How to Pay Tax As an Independent Contractor or Freelancer

While being self-employed gives you the freedom to choose your own work schedule, one major drawback is the responsibility of calculating and paying your own taxes. Independent contractors are responsible for self employment income taxes in lieu of social security and medicare taxes. Because they lack employers to cover half of these payroll taxes, independent contractors typically pay higher tax rates than other workers, making it extra-important to know how to calculate these taxes accurately.

Part 1
Part 1 of 4:

Getting Ready

  1. According to the IRS, the general rule for which types of people qualify as independent contractors is that: "An individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done." [1] In other words, if you set your own hours and control your relationship with your clients, you are probably an independent contractor. Specific criteria for being self-employed include: [2]
    • Being the sole proprietor of a business or an independent contractor.
    • Being a member of a partnership that carries on a trade or business.
    • Being otherwise in business for yourself (including a part-time business).
    • Providing your own tools for your job.
    • Being responsible for your own benefits. [3]
    • On the other hand, if you work as a salaried employee on the staff for a company or organization, you are probably not an independent contractor.
    • If you are unsure what kind of worker you are, you can file IRS Form SS-8 to have the IRS examine your situation and make a decision for you. [4]
  2. These forms document how much income you received from each company you did freelance work for, and will be important for filing your taxes. [5]
    • Contact the institutions you have worked for as a freelancer if you have not received your 1099s by February 1st of the year taxes are due. Your clients are supposed to send you this information no later than January 31st. [6]
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  3. Collect any receipts for money you spent on business expenses, as well as all invoices from the tax year.
    • These receipts will be important if you want to claim any of these expenses on your taxes and thus decrease the amount of income you are responsible for paying taxes on. [7]
    • This includes invoices, receipts for supplies, business expenses, health insurance premium costs, and home office rent.
  4. If you are employed as a regular employee of some company in addition to your freelance work, you will also have W-2 forms, which should be kept separate from you 1099s.
    • A W-2 indicates that you are an employee of a business and taxes have already been deducted. A 1099 shows money earned from freelancing.
    • Report income from W-2s on your 1040 form as normal. Do not report this income along with your 1099s.
  5. Subtract your expenses from your income to find your net income. If you made a profit (net income) of more than $400 on freelance work, you must file a tax return and will owe self-employment taxes in the United States. [8]
  6. These will include the Schedule C, Schedule C-EZ, and Schedule SE forms, in addition to the standard 1040 tax form. [9]
    • These forms are easy to find by simply entering their titles in the search bar at the top of the page.
    • Review the documents and read instructions before beginning. These forms can be quite complicated, so it is important to review these forms carefully.
  7. Part II of Schedule C in the IRS Publication 535 allows you to deduct certain amounts from your taxable freelance income. Check to see if any of these deductions apply to you.
    • Many of the deductions you can make are actually percentages of the costs incurred. For example, any office supplies you may have purchased, as well as the cost of a dedicated work computer may be written off. [10]
    • It is also likely you can deduct a portion of your rent and other housing related expenses if you have a home office. [11]
    • As of the 2017 Tax Cuts and Jobs Act, you can take a 20% Qualified Business Income Deduction on your taxes. You can take this deduction if you earned money from a business you own by yourself or as a partnership. However, there are some limitations on the deduction if you earn more than $315,000 as a couple or $157,500 as an individual. [12]
    • These deductions can greatly reduce your tax liability and as such should be examined carefully.
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Part 2
Part 2 of 4:

Calculating Your Taxes

  1. As with taxes for ordinary employees, the more money you make as an independent contractor, the more you owe in taxes. To find your earnings, first total up all of the money you made selling your goods and/or services as an independent contractor the previous year. If you received a 1099 from every client, this will just be the total of your earnings from each 1099. In the next few steps, you'll use this information to find your taxable income and determine how much you owe.
  2. Business expenses are directly tied to the operation of the business — supplies you bought, wages you paid for work you delegated, travel you made for your work, and so on. Things like groceries and entertainment expenses are not to be included.
    • Note that, in addition to the business expenses above, self-employed people can also receive deductions for things like health insurance, retirement accounts and lawyers and accountant fees. [13]
  3. This is also called a Form 1040 Profit or Loss from Business (Sole Proprietorship) form. This form (available here ) is used to report your freelance income and expenses. [14] You can use the Schedule C-EZ form instead of the regular Schedule C form if your freelance business expenses total less than $5,000 and if you have no employees and no home office deduction. This form (available here ) is simpler and quicker to fill out. [15] Use the steps below to fill out your Schedule C: [16]
    • Enter your total (gross) income from freelance work in Part I.
    • Enter your expenses in Part II.
    • Enter the cost of goods sold in Part III. If your freelance work involves selling any physical goods, you will need to enter the costs of those items, taking an inventory at the beginning and end of each tax year. Additionally, the amount you calculate for Part III will be carried over to Part I as an expense that offsets your gross income. [17]
    • Enter information on your vehicle in Part IV, if you are claiming it as a business expense.
    • Enter any other expenses in Part V. This section includes miscellaneous expenses like bad debts, business start-up costs, or an money you invested making your place of business more energy efficient.
    • Compute your total income or loss, and enter it on line 12 on your Schedule 1.
  4. Income tax isn't the only tax you need to pay as a self-employed person — like ordinary workers, you also owe money for payroll taxes which cover Social Security and Medicare, known as Self-Employment (SE) tax. For work done in 2019, this tax rate amounts to 15.3% of your net self-employment income. This rate comes from the 12.4% tax for Social Security and the 2.9% tax for Medicare. [18] You'll calculate these taxes on form SE. [19]
    • For example, if your net self employment income is $80,000, your SE tax would amount to:
      80,000 × 0.153 = $12,240
    • If your earnings are over the threshold for Social Security, you'll calculate your tax differently. As of January 2019, the threshold is $132,900, so you won't pay Social Security taxes on income above this amount. [20]
    • Starting from 2013, you must also pay an additional 0.9% Medicare tax if your taxable income is over a certain threshold: $200,000 for singles, $250,000 for married filing jointly. [21]
  5. Once you know both your income tax and your additional estimated self-employment tax, add them together. This is the total tax you'll need to pay. [22]
    • You can pay your taxes either quarterly or annually. However, it's best to make quarterly payments so that you avoid a lump sum and possible penalties from not pre-paying your taxes. If you owe more than $1,000 in taxes, you are usually allowed to make quarterly tax payments. These freelancer tax payments help break up large amounts owed to alleviate you of the stress of having to pay it all at once.
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Part 3
Part 3 of 4:

Paying Your Taxes Annually

  1. This is usually a 1040 (available here ) for most self-employed freelance workers. Use your schedule C and 1040-SE to guide you as you fill out these forms. Complete no later than the April 15th tax day deadline.
    • The deadline to file taxes on income earned in 2018 is April 15th, 2019. [23]
  2. Write down the annual amount of self-employment tax you owe on the tax payment vouchers included with Form 1040-ES. Make sure you take into account any prepayments you made toward your taxes, if you've sent in tax payments throughout the year.
    • If you didn't make quarterly payments over the prior year, you'll need to pay all of your taxes now.
  3. The IRS lets you pay your taxes two ways: electronically or by mail. See below:
    • Electronically: Payments can be made using the Electronic Federal Tax Payment System (EFTPS) available here . Additional service fees may be charged for the convenience of paying online.
    • Mail: The IRS considers the postmark date as your payment date. Write checks to "United States Treasury" and include the estimated tax payment vouchers in your envelope. Mail your 1040-ES voucher, schedule C, 1040, and payment to the appropriate IRS office for your region of the United States.
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Part 4
Part 4 of 4:

Making Quarterly Payments

  1. 1
    Determine if you need to make quarterly payments. Self-employed people usually have the option of paying quarterly (rather than all at once) if they owe more than $1,000 in self employment taxes. In addition to preventing you from owing a large sum at the end of the year, this allows you to avoid penalties from not prepaying your taxes. The government requires you to prepay at least 90% of your taxes for the year or an amount equal to 100% of your prior year taxes.
    • You need to pay these taxes in advance.
  2. This form is available here . [24] Fill out the worksheet on page 8. This worksheet form is to determine your estimated taxes for the year. In other words, since you don't have an employer withholding part of each paycheck for tax purposes, you need to determine if , how much , and when you are required to pay tax on your own.
    • Use the tables on page 7 to determine your income tax liability. For example, if you are filing as a single person and you made $80,000 last year, you would use the instructions for income between $39,475 and $84,200: [25]
      4,543.00 + 0.22 (80,000 - 39,475)
      4,543.00 + 0.22 (40,525)
      4,543.00 + 8,915.50 = $13,458.50
    • If you have a previous year's tax return for similar work, use it as a guideline. First-time independent contractors must estimate yearly earnings to determine the applicable tax payment schedule — if you estimate too high or too low, you can re-file your 1040-ES later.
  3. You'll pay each quarter's taxes throughout the year, so payments are due every 3 months. Payments for income earned in 2019 are due on the 15th of April 2019, June 2019, September 2019, and January 2020. [26]
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Expert Q&A

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  • Question
    Can I just make one large payment when it's time to file again?
    Cassandra Lenfert, CPA, CFP®
    Financial Advisor & Certified Public Accountant
    Cassandra Lenfert is a Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) in Colorado. She advises clients nationwide through her tax firm, Cassandra Lenfert, CPA, LLC. With over 15 years of tax, accounting, and personal finance experience, Cassandra specializes in working with individuals and small businesses on proactive tax planning to help them keep more money to reach their goals. She received her BA in Accounting from the University of Southern Indiana in 2006.
    Cassandra Lenfert, CPA, CFP®
    Financial Advisor & Certified Public Accountant
    Expert Answer
    You can choose not to make quarterly payments, but you may end up owing a penalty. The government requires you to prepay at least 90% of your current year taxes or 100% of the amount of taxes you paid during the prior year. If you don't prepay your taxes, you may owe a 4% penalty.
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  • Question
    Can I contribute to my IRA pre-tax as an independent contractor?
    Cassandra Lenfert, CPA, CFP®
    Financial Advisor & Certified Public Accountant
    Cassandra Lenfert is a Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) in Colorado. She advises clients nationwide through her tax firm, Cassandra Lenfert, CPA, LLC. With over 15 years of tax, accounting, and personal finance experience, Cassandra specializes in working with individuals and small businesses on proactive tax planning to help them keep more money to reach their goals. She received her BA in Accounting from the University of Southern Indiana in 2006.
    Cassandra Lenfert, CPA, CFP®
    Financial Advisor & Certified Public Accountant
    Expert Answer
    Your eligibility to contribute to your IRA is determined by if you earned income, how much income you earned, and if you participated in an employer retirement plan. For 2018, you could contribute up to $5,500 a year to your IRA ($6,500 if you're age 50 or older). If you're self-employed, you also have the option of contributing to a self-employed pension (SEP) IRA, which bases your contribution on your net self-employment income. In some cases, a SEP IRA will allow you to contribute more to your IRA than traditional IRAs. For 2018, the maximum contribution allowed to a SEP IRA was $55,000.
    Thanks! We're glad this was helpful.
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      Tips

      • Note that you are required to file a tax return even if your earnings don't cross the minimum $400 threshold if you meet any of the special requirements on page 9 of the 1040 instructions (available here .) [27]
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      • If you also need to pay a state income-tax, you'll need to calculate that tax separately.
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      • It's often a good idea to consult with a certified tax preparer if you are a new independent contractor. The tax preparer can set up your booking systems to help you understand why you owe money and how much estimate tax payments you should expect to pay to avoid future penalties.
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      Warnings

      • Falsifying information or failing to make estimated tax payments can result in penalties, fines, and interest.
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      References

      1. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined
      2. ↑ http://www.irs.gov/Individuals/Self-Employed
      3. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
      4. ↑ http://www.irs.gov/pub/irs-pdf/fss8.pdf
      5. ↑ http://www.freelancewritinggigs.com/2010/01/its-freelance-tax-time-are-you-ready/
      6. ↑ http://www.freelancewritinggigs.com/2010/01/its-freelance-tax-time-are-you-ready/
      7. ↑ http://www.freelancewritinggigs.com/2010/01/its-freelance-tax-time-are-you-ready/
      8. ↑ https://moneydoneright.com/freelance-taxes/
      9. ↑ http://www.kiplinger.com/article/taxes/T056-C000-S001-tax-filing-for-freelancers-an-introduction-to-sche.html
      1. ↑ http://www.kiplinger.com/article/taxes/T056-C000-S001-tax-filing-for-freelancers-an-introduction-to-sche.html
      2. ↑ http://www.kiplinger.com/article/taxes/T056-C000-S001-tax-filing-for-freelancers-an-introduction-to-sche.html
      3. ↑ https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs
      4. ↑ http://www.irs.gov/pub/irs-pdf/f1040.pdf
      5. ↑ http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
      6. ↑ https://www.irs.gov/pub/irs-prior/f1040sce--2018.pdf
      7. ↑ http://www.irs.gov/pub/irs-pdf/i1040sc.pdf
      8. ↑ http://www.irs.gov/pub/irs-pdf/i1040sc.pdf
      9. ↑ https://www.irs.gov/individuals/international-taxpayers/social-security-tax-medicare-tax-and-self-employment
      10. ↑ http://www.irs.gov/pub/irs-pdf/f1040es.pdf
      11. ↑ https://www.ssa.gov/planners/maxtax.html
      12. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/questions-and-answers-for-the-additional-medicare-tax
      13. ↑ http://www.irs.gov/pub/irs-pdf/f1040es.pdf
      14. ↑ http://www.irs.gov/pub/irs-pdf/f1040es.pdf
      15. ↑ http://www.irs.gov/pub/irs-pdf/f1040es.pdf
      16. ↑ http://www.irs.gov/pub/irs-pdf/f1040es.pdf
      17. ↑ https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2
      18. ↑ http://www.irs.gov/pub/irs-pdf/i1040gi.pdf

      About this article

      Article Summary X

      To pay your taxes an independent contractor or freelancer, start by downloading the forms from the IRS website, including Schedule C, and SE and a 1040 tax form. Then, determine your gross earnings based on 1099 forms from your employers. Next, calculate your business expenses, such as office space and supplies, and subtract that amount from your income. If this amount it more than $400, you’ll owe a self-employment tax. Use the worksheets on the printed forms to calculate how much tax you owe, then pay it online or by sending a check to the IRS. For advice from our Accounting reviewer on how to pay taxes quarterly, read on!

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