First, make sure you understand your business structure
Most independent contractors are technically small business owners that operate either as a sole proprietorship, limited liability company (LLC), partnership, or S corporation. With any of these business structures, your earnings are reported as part of your personal income for tax purposes.
In the USA, approximately 73% of businesses are registered as sole proprietorships—clearly the most popular business structure for entrepreneurs going it on their own. Setting one up is quick and easy: if you don’t formally register as a certain type of business entity, the IRS will treat you as a sole proprietor by default.
If you run your business part time, and you’re also someone’s employee, you’ll need to file your own business taxes with Form 1040 (US Individual Income Tax Return). Your employer also files a Form W-2 (Wage and Tax Statement) for you.
Note: taxes work the exact same way for independent contractors and freelancers. As long as you’re self-employed, the IRS only looks at you through the lens of your business entity. So if you understand how your entity type works, you’ll know how your taxes work.
The taxes you need to pay
Self-employed individuals need to pay self-employment tax (which is 15.3% of your net business income) as well as state and federal income tax.
Self-employment tax
FICA consists of your federal Social Security tax (12.4%) and Medicare tax (2.9%), for a total self-employment tax rate of 15.3% of your net business income.
When you pay self-employment tax on your freelance income, you’re paying both the portion of FICA you would normally pay as an employee, and the portion your employer would match.
Note: Even if your business is a side hustle, and your employer is withholding FICA from your income, you’ll still need to pay self-employment tax on all the income you earn from your side venture.
Your self-employment tax is filed with Schedule SE, Form 1040.
Income tax
You’ll need to pay income tax just like all taxpayers, in addition to self employment tax. Your taxable income is your total income for the year minus any deductions. From there, you consult the tax table for the year to see what your income tax rate will be.
Calculating and paying your taxes
You’ll pay all these federal taxes together, four times a year when you pay estimated quarterly taxes.
To calculate how much tax you need to pay, use the Estimated Tax Worksheet, which is part of Form 1040-ES.
You’ll also use Form 1040-ES to file your quarterly estimated taxes.
Or if you want to get straight to calculating, use our Self-Employed Tax Calculator.
Federal taxes vs. state and municipal taxes
For the most part, this guide covers federal taxes.
But your state and municipality may also expect you to pay taxes. Since every state and municipality is different in this regard, it’s beyond the scope of this guide to cover them all.
To find out what you need to pay in addition to federal taxes, visit the tax authorities for your state and municipality. Here’s a directory to every US state’s tax authority, and here’s a list of every tax-collecting municipality in the USA.
If you’re a freelancer, read this
As a freelancer, you depend on your clients to file Form 1099-NEC for you. When you total that 1099 income up, you’ll get most of the income that you need to report on your tax return (but not all—if a client paid you less than $600 in the tax year, they won’t have to file a 1099-NEC.)
When you hire subcontractors to take care of freelance work, the script is flipped. It’s up to you to fill out and file Form 1099-NEC for every subcontractor you pay more than $600 during the course of the year.
The deadline for getting a Form 1099-NEC to a subcontractor is January 31st (or the next business day if it falls on a holiday or weekend). All Form 1099-NECs must also be filed with the IRS by January 31st.
Further reading: Independent Contractors (Everything You Need to Know)
Subcontractor agreements
When you work with a subcontractor, it’s best to have a subcontractor’s agreement in place. In addition to other info, this agreement between you and the subcontractor lists the services they’ll be providing—as well as whether they will be using your facilities and equipment or their own.
It’s important a subcontractor doesn’t do any work besides that described in the agreement. In case of an audit, the IRS will try to determine who works for you as a contractor and who works for you as an employee.
If they decide that one of your subcontractors is fulfilling the duties of an employee, you could be penalized for not filing the correct taxes (i.e., your share of FICA).
If you’re hiring contractors for the first time, and you’re not sure how you should classify them, ask an accountant.
How to take advantage of tax deductions
Sadly, it’s illegal to skip paying taxes outright. However, there are ways you can minimize how much of your self-employment income goes to the IRS.
That’s where deductions come in handy. When you spend money on certain business expenses (like home office expenses, marketing costs) the IRS will reduces your tax liability.
Your tax deductions are reported on Schedule C of Form 1040, which you use to report your personal income. Form 1040 is filed at the end of the year, with your final quarterly estimated tax payment.
Further reading:
- Tax Credit vs Tax Deduction: What’s the Difference?
- What Happens If You Don’t File Taxes For Your Business
Here’s what you can deduct
From home office repairs to health insurance, there’s a wide range of deductions available to independent contractors. To learn about which deductions you may qualify for and how to report each one, read our article Small Business Tax Deductions and How to Claim Them.
How to file your taxes
Doing it yourself
If you don’t owe any outstanding taxes from the past, and your business hasn’t changed significantly in the past year or two, you can opt to roll up your sleeves and file taxes yourself.
There are two methods for filing your taxes: by mail or online.
To file by mail, you’ll have to obtain tax forms by ordering them online, then fill them out and submit them to the IRS. You can pay your taxes by check or money order.
To file online, you create an account on the IRS website and transfer funds directly from your credit card or debit accounts.
We recommend online filing because of its ease and speed. It also saves trees and reduces the likelihood of paper cuts. When you file online, your payment history and other important info is stored in your secure IRS account, so you don’t need to worry about paper records being lost or damaged.
Hiring a tax professional
If you have any questions about filing your taxes or if your business has undergone recent growth, it’s a good idea to consult with a Certified Public Accountant (CPA). When you’re a potential new client, many CPAs are willing to sit down with you for a free consultation.
Even if you don’t hire an accountant to do your tax preparation, they can help advise you—for instance, on the best way to estimate your quarterly taxes. Learn more about how to hire an accountant.
You can also find tax professionals who can file for you and provide some tax advice for less than what a CPA would cost. With Bench, you can add tax advice and filing to your subscription and get unlimited, on-demand access to our tax professionals.
Further reading: Choosing a Tax Advisor: Everything You Need to Know
Preparing your books for tax filing
Even if your business is only a part-time venture, you should still have a bookkeeping solution in place. Most providers are DIY solutions meaning you need to import transactions, ensure they’re categorized correctly, and review them constantly to get your financial information. But some providers (like Bench) are completely automated.
After you “close” your books after the end of the year—bring all accounts up to date, and finish record-keeping for the financial year—you can quickly determine your income.
You need to know your income in order to file your taxes. If you haven’t closed your books, you may find yourself scrambling to get all your information together so you can file a Form 1040 before the tax deadlines.
If your books are well-organized and you have separate ledgers tracking different categories of business expenses, you’ll also find it easier to track your deductions for the year.
Quarterly taxes for the self-employed
Earn more than $1,000? You need to pay taxes quarterly, in April, June, September, and January.
If you also work for someone as an employee, they’ll withhold taxes from your pay. But the money you make on the side is also taxed. And those taxes, in the form of a portion of your income, need to be withheld by you.
You can calculate your estimated tax payments based on last year’s income, or on your estimated income for the present year.
Contractor tax deadlines
Keep in mind that deadlines for state and local taxes will be different from those set by the IRS.
Quarterly estimated tax payment deadlines for the 2024 tax filing year
Don’t forget the last of 2023’s quarterly estimated tax payments due on January 16, 2024!
Once you start making quarterly tax payments for the 2024 tax filing year, here are the deadlines you’ll have to meet through 2024/25:
- April 15, 2024
- June 17, 2024
- September 16, 2024
- January 15, 2025
Personal income tax (Form 1040)
Tax filing for the 2023 tax year opens on January 1st.
Your income tax for 2023 (Form 1040) must be filed by April 15, 2024.
This income tax filing will also include whatever deductions you’re claiming.
If you’re not ready to file your taxes, you can request an extension with Form 4868 (Automatic Extension of Time to File US Individual Income Tax Return). If you request an extension to file your 2023 taxes, your final deadline becomes October 15, 2024. You’ll still need to make a payment on time, though. Learn more about how to get a tax extension, and what happens when you do.
Partnerships (Form 1065)
If you operate a partnership, you’ll file your taxes as an individual. However, the partnership still needs to report its financial activity for the year to the IRS. This is done with Form 1065 (US Return of Partnership Income), which is due March 15th, 2024.
S corporations
If you’re a shareholder in an S Corporation, you need to file a Form 1120S (US Income Tax Return for an S corporation), which reports the financial activities of the organization, as well as how many shares you control. Every shareholder in the S Corporation must file Form 1120S. Form 1120S is due on March 15th, 2024.
Subcontractors (Form 1099-NEC)
If your business hired a contractor in 2023 and paid them more than $600 in a year, it’s your responsibility to file a Form 1099-NEC with the IRS and send a copy to the contractor. You must mail them their Form 1099-NEC and submit a copy to the IRS by January 31st, 2024.
Further reading: 1099-NEC and 1099-MISC: Differences, Deadlines, and How-To’s
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Tax time can sting a little. Nobody likes sinking hours into figuring out how much money they owe the IRS.
If you’d rather simplify the process, try Bench. We’ll get your bookkeeping done to IRS standards and get your taxes filed for you so your taxes are taken care of from day one.
