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Paying Estimated Taxes
The IRS says that independent contractors must file estimated tax returns and remit federal taxes owed if they will owe $1,000 or more in a year. Use IRS Form 1040-ES to file estimated tax returns. Estimate adjusted gross income, taxable income, credits and deductions you expect to claim, as well as the taxes owed. You can pay estimated taxes on a schedule you find convenient. Monthly or weekly payments are fine provided the entire amount due is remitted by the end of each quarter. The IRS recommends using its online Electronic Federal Tax Payment System to pay estimated taxes.
As an independent contractor, you can deduct business expenses. Examples of expenses include office supplies, the cost of travel to meet clients and professional licenses. Independent contractors who work primarily out of their homes may qualify for a home office deduction. The amount of the deduction is a proportion of the cost of maintaining the home equal to the percentage of the floor area used exclusively for business purposes. Taxable income for an independent contractor
is equal to total revenues minus business expenses.
Employees and employers each pay a portion of Social Security and Medicare taxes. As an independent contractor, you are your own employer and pay both employer and employee shares of Social Security and Medicare taxes. The IRS calls this “self-employment tax.” As of 2015, the self-employment tax rates were 12.4 percent for Social Security and 2.9 percent for Medicare for a combined rate of 15.3 percent. You pay self-employment tax on net earnings, which equal 92.35 percent of pretax profit. The reduction of 7.65 percent represents the employer share of self-employment tax, which is classified as a business expense by the IRS.
Filing Tax Returns
Independent contractors must file taxes using the individual 1040 tax return to report self-employment income. You should receive 1099-MISC forms from clients when they pay you $600 or more during the year. The 1099-MISC documents your receipts and must be attached to your tax return. Use Schedule C or Schedule C-EZ to report revenues, business expenses and profit or loss. Complete Schedule SE to calculate self-employment tax.