Guide: How to Pay Independent Contractor Taxes in the US
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Working as an independent contractor can be liberating—you get to set your own working hours, choose your clients, and run your business as you see fit.
However, being a contractor is very different from being an employee, especially when paying taxes. Whether you are a small business owner, a podcast host, or a designer offering services to clients, you’ll report and pay taxes a little differently than the typical employee.
We’ll cover tax obligations and tax tips for independent contractors in the US to pay their taxes smoothly.
Disclaimer: This article is informational and should not be considered tax advice.
What is an independent contractor?An independent contractor is a self-employed individual or small business owner who provides services to client companies as a non-employee, usually on a short-term or per-project basis.
Contractors are in charge of their working hours, equipment, where they work, and how they do their job. The client cannot direct the contractor’s work beyond the project’s outcome and deadline.
Check out our article How to Be an Independent Contractor to learn how to get up and running as a contractor.
What taxes must you pay as an independent contractor?
Understanding your tax liability as a contractor can be daunting, especially if you’ve only worked as an employee. Independent contractors are responsible for their own taxes. Their client companies don’t offer tax withholding or employer contributions like they would for employees.
As an independent contractor, you’ll need to pay two types of tax; income tax and self-employment tax (SE tax). We explain both these types of tax in more detail in the following sections.
When do you need to pay taxes as a contractor?
If your net earnings from self-employment are $400 or more, you’ll need to file a tax return with the IRS (internal revenue service). If your net earnings are under $400, you still need to file an income tax return if you have other earnings, such as employment income.
If you expect to owe more than $1,000 in taxes for the tax year, the IRS requests that you file estimated tax payments four times a year to avoid a large tax bill at the end of the year.
There are four quarterly tax payments for your estimated tax. The deadlines for them are:
- April 15th
- June 15th
- September 15th
- January 15th
You’ll need to pay your quarterly taxes on time and avoid underestimating them since both actions can result in a tax penalty or an IRS audit. If you overpay the quarterly taxes, you will get a tax refund from the IRS.
Paying your self-employment tax
The SE tax is the contractors’ version of the FICA tax usually paid by employers. Self-employment tax (SE tax) consists of Social Security tax and Medicare tax contributions.
The self-employment tax rate in the US is 15.3% of your net earnings as a contractor. The rate comprises two halves:
- Half of the tax (7.65%) is the “employee’s” portion
- The other half (7.65%) is the “employer’s” portion
As a self-employed person, you have to pay for both parts. But the IRS recognizes that’s unfair, so you can claim the employer’s portion (again, 7.65%) as a deduction when filing your tax return.
Paying your income tax
The second tax on your list is the federal income tax. The tax system is progressive in the US, which means you pay more when you earn more.
There are seven federal tax brackets for the 2022 and 2023 tax years:
Federal vs. state and municipal taxes
The two types of taxes we covered above are federal taxes. Depending on your state, additional state or municipality taxes may apply. Several states, such as Texas, Florida, Washington, and Nevada, don’t charge personal income tax. State and local regulations vary considerably, so you should check out the tax authority in your state for detailed information.
Claim deductions to reduce your income tax
You can reduce your income tax by claiming deductions from your business income. These deductions often considerably lower the amount of your taxable income. Therefore, knowing everything you can claim on your tax return will help you reduce your tax bill as much as possible.
Deductions are reported on Schedule C of your form 1040. We cover the following tax deductions in-depth in our tax deductions guide, but here’s a quick overview of some typical expenses you can claim:
Home office expenses
Many contractors work from home. Since part of your home serves as a place of business, you can write off a portion of your rent, mortgage, or property taxes. There are two requirements you need to meet to qualify for this deduction.
- The home office must be a dedicated place you use exclusively for work.
- The home office must be the primary place for doing business.
There is a simplified deduction for home offices under 300 square feet. For these, instead of detailing the expenses, the IRS lets you claim $5 per square foot, with a maximum allowance of $1,500 per year.
Advertising and promotion
Instead, you spread the cost of your business equipment over the years of use. There are several ways for taxpayers to write off the full equipment costs in one year, but they are more complicated than regular deductions. It’s best to consult a tax professional to record depreciation for your high-value equipment properly.
Cell phone and internet expenses
Independent contractor tax forms
In the US, contractors must fill out the following tax forms throughout the tax year. You can file your taxes either by mail or online. We recommend you opt for the online method. It’s faster, you don’t need to order the forms online, and you don’t have to pay by check.
For online filing, you need to open an account on the IRS website and transfer the money directly from your bank account or credit card. Filing online also saves all your information, including payment history, on the account so you don’t need to worry about papers getting lost.
Form W-9: Share your Social Security or tax identification number with your client
If the client intends to pay the contractor $600 or more in a year, they must provide the contractor with form W-9 to fill out and return before business commences.
The contractor must complete the W-9 form by entering their name, address, and Social Security number or tax identification number and return it to the client. The client will then retain this form for four years should any questions arise from the IRS.
The form W-9 acts as an agreement that the contractor is responsible for withholding taxes from their gross income. The client also uses the information on the W-9 to complete a 1099-NEC form at the end of the tax year. We explain what the 1099-MISC form is later in this article.
Form W-8BEN (or W-8BEN-E): verify your country of residence (non-US)
Contractors who lack US citizenship or residency but have worked in the US or earned income in the US must complete form W-8BEN before they receive their first payment from a US client.
A W-8BEN form is a tax document used to certify that your country of residence is outside of the United States for tax purposes.
If you’re a resident of a foreign country with whom the United States has an income tax treaty, submitting a Form W-8BEN may reduce your tax or exempt you from paying US tax altogether.
The contractor must download and complete Form W8-BEN by filling in their:
- Full name
- Street address
- Country of residence
- Tax number
- Date of birth
- Article number (US tax treaty information)
- Withholding rate
Finally, the contractor should sign and date the form and return it to the client, where it will remain on file and valid for the remainder of the year and for three full calendar years after that.
Form 1099-NEC: Report your wages to the IRS
If a contractor receives $600 or more from their client in a tax year, they can expect to receive a 1099-NEC form from their client.
The contractor must complete the form by providing the following information:
- The clients’ information (name and address)
- The contractor’s information (Name, address, and taxpayer ID)
- The total amount of compensation paid during the year
- Any federal income tax withheld
- Any state tax withheld
- The total state income to the contractor for the year
The contractor must return this form to the client so they can file it with the IRS by January 31 each year.
If a contractor does not receive the 1099-NEC form by the end of January, they should request it from the client directly.
Form 1040: File a return for your self-employment income
The IRS form 1040 is one of the official documents that US taxpayers use to calculate and file their taxable income by the April tax deadline.
Before contractors file a return for their self-employment income, they must first determine if they made a profit of over $400. Contractors only need to file a return for self-employment income if their net earnings (revenue minus expenses) from the business exceed $400.
If your net earnings are under $400, you still need to file an income tax return if you have other earnings, such as employment income.
Contractors can calculate their business’s net income or loss on the Schedule C of their form 1040.
Regarding self-employment tax, you’ll use Schedule SE on form 1040 to calculate how much you owe based on the self-employment income.
Do you need to pay US taxes as an international independent contractor?
Even if you’re an international contractor, your income may still be taxable in the US. There are three possible scenarios:
You work in the US, but your country has a tax treaty with the US
If you have a working US visa and perform work in the US as a non-US citizen, you may be exempt from US taxes or need to pay tax at a reduced rate.
You must fill in form 8233 if your country of residence has a tax treaty with the US to claim exemption from withholding compensation for personal services. If you’re unsure whether your country has a treaty with the US, you can check the list on the official IRS website.
You work in the US, and there’s no tax treaty between your country and the US
If there isn’t a tax treaty between the US and your country, you must withhold 30% of your US-sourced income to pay income tax for non-residents using form 1099-NEC, which you should receive from your client.
The deadline to mail or e-file 1099s to the IRS for the 2023 tax year is January 31, 2024.
Do you need help determining whether your income is US-sourced? The IRS says you can determine the source of income by the location you perform the services. If you’re located in your country or anywhere outside the US while performing work, despite working for a US-based company, you don’t earn US-sourced income.
If you perform any part of your service in the US, you need to meet these conditions if you want to avoid tax obligations:
- You haven’t spent more than 90 days in a tax year in the US
- You have made $3,000 or less
- You have performed services for an office or entity maintained in a foreign country
You live and perform all your work in your country of residence
Foreign contractors outside the US earning income from US-based clients must complete form W-8BEN. If you’re acting as a business entity, you’ll receive form W-8BEN-E from your employer.
In this scenario, your income isn’t taxable in the US, and you’re responsible for paying your taxes in your country of tax residence.
The hiring company must retain a copy of your W-8BEN form to prove that you aren’t a US citizen and protect them in case of an IRS audit.
The form is valid for three years, and you need to submit a new one if any of the information changes or your collaboration with the client continues for over three years.
Tips for filing taxes as an independent contractor
Now that you’re familiar with contractor taxes, there are some tips and tricks to keep in mind to make tax time less burdensome for you and your business.
Hire a tax professional
If you don’t want to do taxes by yourself after learning about all of the forms and deadlines we went over, consider hiring an expert. Many accountants specialize in small business taxes; some have a CPA (Certified Public Accountant) certification.
Look for an accountant specialized in your branch of business - their expertise may help you save thousands of dollars in deductions and countless hours browsing the IRS tax guide. Remember that tax professionals’ fees are tax-deductible.
Keep your tax records
One of the crucial tricks in making the tax season less stressful is having your business transactions organized and adequately tracked. Tax filing is much easier when your documents and records are under control.
We recommend implementing one of the many small business bookkeeping systems like FreshBooks, QuickBooks, and ZipBooks, which enable record-keeping for different business expense categories and make closing the financial year easier. You can even program the system to send automated payment reminders to the payer.
Also, we mentioned receipts for tax deductions earlier. Luckily, there’s no need to organize and store paper receipts in the digital age anymore. The IRS accepts digital records, so you can snap photos or scan receipts and invoices and store them in a dedicated folder on your computer or in the cloud.
Make sure your client doesn’t treat you like an employee
Sometimes, an independent contractor and client relationship drifts into becoming an employer-employee relationship. Long-term contractor arrangements are a common reason for blurred lines. Over time, contractors may find the client expects them to behave in ways associated with full-time employees, like working full-time hours or being told how to do their job.
This scenario is problematic in the eyes of the law because it means that your client has potentially misclassified you as a contractor when you should be an employee. Employees have the right to different employee benefits, and employers must withhold tax contributions on their behalf.
If you’re unsure whether you should be an employee or an independent contractor, consider how your business relationship functions. Does your employer control your schedule, how you work, when, and where? If so, you should have employee status. If they only have control over the results of your work, you’re an independent contractor.
Not all cases are as straightforward. This 20-factor test can help you determine your status.
Ensure your contract is compliant with the local labor law
Your client must also ensure that your contract and independent contractor agreement comply with the local labor law in your country of tax residency. Checking the terms of the work arrangement before you sign will ensure you avoid misclassification, and the company avoids potential penalties and legal issues.
If you want to learn more about how companies can hire international independent contractors legally, check out this article.
Handle your taxes effortlessly with Deel
Are you a contractor working with multiple clients? Deel can streamline many processes for you and your clients, from automated tax document collection (such as W-8, W-9, and 1099 forms), smart invoicing, contracts compliant with local labor laws, worldwide payments, and simple withdrawals. Request a demo to learn more.