Welcome to the age of the independent contractor.
The gig economy is growing. So are the number of people working as independent contractors.
But being an independent contractor isn’t always straightforward. It is especially confusing to file taxes. Are you technically self-employed? Or are you classified as an employee? Should you pay quarterly taxes? If so, how?
If you’re feeling overwhelmed, don’t worry; you’re not alone.
We’re here to help. We’ve answered the most common questions about being an independent contractor!
- How is an independent contractor defined?
- Is there a difference between being an independent contractor and an employee (W2)?
- Is there a difference between being an independent contractor and being self-employed?
- What are some examples of being an independent contractor?
- The pros and cons of being an independent contractor
- How to pay taxes as an independent contractor
- What is the Self-Employment Tax?
- How much will I pay in taxes if I’m an independent contractor?
- How can I lower my taxes?
- Do I need to pay quarterly taxes?
- How do I become an independent contractor?
- IRS Resources
- Key Takeaways
How is an independent contractor defined?
The IRS defines independent contractors as individuals “who are in an independent trade, business, or profession in which they offer their services to the general public.” These are individuals who work in a contractor capacity for companies; therefore, they are responsible for their own insurance, equipment, and taxes.
So if you work as a delivery driver for DoorDash, Lyft, Uber, Shipt, or others, you’re an independent contractor.
Example: Sam is working at DoorDash as a side hustle while he tries to get his creative career off the ground. He primarily drives on evenings and weekends. Since he is an independent contractor, he saves a portion of his DoorDash income automatically to prepare for taxes.
Is there a difference between being an independent contractor and an employee (W2)?
Yes! Being an independent contractor is different from being a W-2 employee.
One key difference is who pays taxes and how much they pay. While an employer withholds a portion of taxes from an employee’s paycheck, companies do not withhold any taxes from the income they pay to independent contractors. As a result, independent contractors are responsible for paying the Self-Employment Tax for their income.
Is there a difference between being an independent contractor and being self-employed?
If you are an independent contractor, you are self-employed. This means that your earnings are subject to the Self-Employment Tax.
What are some examples of being an independent contractor?
With so many gig platforms out there, there is an increasing number of ways to work as an independent contractor. Here are a few examples:
- Rideshare jobs, like Lyft or Uber
- Delivery jobs, like Postmates, Grubhub, DoorDash, or Drizly
- Independent photographers, like a wedding or portrait photographer
- Writers, like a blogger or contributing writer
- And more!
The pros and cons of being an independent contractor
There are benefits and challenges to this kind of work.
- Freedom to select your own hours
- Opportunity to pick and choose jobs
- Opportunity to work for a variety of places
- Ability to try out new things
- Less financial security
- Lack of benefits, from health insurance to a 401k
- Fewer structured opportunities for mentorship
How to pay taxes as an independent contractor
As a self-employed individual, you are generally responsible for estimated quarterly tax payments and an annual return.
You are responsible for federal and state (if applicable) taxes on your adjusted gross income. So the more tax deductions you can find, the more money you’ll keep in your pocket.
Filing an annual return: To file yearly taxes, you’ll need a Schedule C form. Use the income calculated on this form to calculate the amount of Social Security and Medicare taxes you should have paid during the year. You’ll file a 1040 or 1040 SR to report your Social Security and Medicare taxes.
Filing quarterly taxes: First, calculate your adjusted gross income from self-employment for the year. (The more deductions you find, the less you’ll have to pay!) Use the IRS’s Form 1040-ES as a worksheet to determine your estimated tax payments.
What is the Self-Employment Tax?
The self-employment tax rate is 15.3% (12.4% for Social Security tax and 2.9% for Medicare). The self-employment tax applies to your adjusted gross income.
If you are a high earner, a 0.9% additional Medicare tax may also apply.
How much will I pay in taxes if I’m an independent contractor?
How much you pay will depend on various factors, including how much you earn and how many tax write-offs you find. Nevertheless, independent contractors are usually responsible for paying the Self-Employment Tax and income tax.
With that in mind, it’s best practice to save about 25–30% of your self-employed income to pay for taxes. (If you’re looking to automate this, check out Tax Vault!) And, remember, the more deductions you find, the less you’ll have to pay.
How can I lower my taxes?
The easiest way to lower your payments is by using a mileage and expense tracker. By tracking your work mileage and expenses, you should be able to find thousands of dollars worth of tax deductions. Finding more tax deductions means that more money stays in your pocket.
Example: Sam uses Everlance’s #1 mileage & expense tracker to track his work mileage and expenses automatically. At tax time, he exports this information and writes everything off. He typically finds $6,500/yr in deductions.
Remember: The more deductions you have, the lower your taxable income will be, and the less you’ll owe to the IRS.
Do I need to pay quarterly taxes?
If any of the following apply to you during the year, you may have to pay quarterly taxes:
- You expect to owe $1,000+ on taxes.
- You made $400+ in self-employed/1099 income.
For the full details, check out the IRS’s clarification: “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”
While the annual return is due on Tax Day (April 15th), quarterly tax payments are due every quarter. Make sure to pay estimated taxes on time.
The four estimated tax payments are usually due each year on the 15th of April, June, September, and January. If that date falls on a weekend or federal holiday, the filing deadline is pushed to the following business day. If you don’t pay on time, then you may be subject to a penalty.
How do I pay quarterly taxes?
Here is how to calculate your quarterly taxes:
- Calculate your adjusted gross income from self-employment for the year.
- Use the IRS’s Form 1040-ES as a worksheet to determine your estimated taxes.
How do I become an independent contractor?
There are many ways to become an independent contractor! It just depends on what you are most interested in and what resources you have on hand.
For instance, if you have a car, then you could become a delivery driver. If you don’t have a car, you could leverage your creative skills to work as a writer or photographer.
If you’ve got a skill, there is likely a way to leverage it into a gig!
Understanding independent contract work
- Definition of an independent contractor: individuals “who are in an independent trade, business, or profession in which they offer their services to the general public.” These are individuals who work in a contractor capacity for companies; therefore, they are responsible for their own insurance, equipment, and taxes.
- If you’re an independent contractor, then you’re self-employed.
- As an independent contractor, you’re responsible for quarterly and annual taxes.
- Being an independent contractor means you have more freedom but less security than traditional employees!
- There are many ways to become an independent contractor. If you have a skill, there’s a way to leverage it in the gig economy!
Meet Everlance, the #1 mileage & expense tracker.
Everlance is the #1 app for tracking company mileage & expenses. With Everlance, you can automatically capture your car mileage and business expenses—which likely equal thousands of dollars of deductions. When preparing for taxes, download your mileage and expense records. Then, hand them over to your accountant or import them directly into your tax preparation software. Money saved! 🎉
Your tax situation is unique—just like you! Our Gig Guides represent generalized tax information. If you need help with your specific tax situation, please reach out to your tax advisor.