LUTZ BUSINESS INSIGHTS
do independent contractors pay taxes?
brandi mckay, client accounting services manager
If 2020 is the first year you’ve had to work as an independent contractor, you’re not alone. The pandemic has forced many Americans to take on side gigs to replace lost income. That means a whole new way of preparing and filing income taxes.
Warning: Make sure that you truly are an independent contractor and not an employee. The IRS makes this distinction very clear and takes it quite seriously. We can help you determine this as part of a broader discussion about bookkeeping for independent contractors.
As a freelancer or other self-employed individual, you are indeed expected to pay income taxes – if you make $6400 or more from your work during the tax year. You do not receive W-2 forms in January since no one is withholding and paying taxes for you. Instead, you’ll get a 1099-NEC form (Nonemployee Compensation). The individual who is paying you should have already had you complete a Form W-9 (Request for Taxpayer Identification Number and Certification) so your income can be reported both to you and to the IRS.
If you’ve been saving some of your income to pay your eventual tax bill, you’re smart. You not only have to pay income taxes on the compensation you received using the same tax tables that W-2 employees use, but you’ll also have to pay the portion that employers remit for their employees. This is the self-employment tax, which is a social security and Medicare tax. When you prepare your income taxes, you’ll be completing a Schedule SE to calculate it.
You’ll also be preparing and filing a Schedule C with your 1040, which contains a detailed breakdown of your income and expenses for each solo business you operated. It’s important that you keep receipts for all of your expenses, so you don’t miss any legitimate business deductions. You may or may not get pay stubs from your employer depending on how you’re paid, but your income will be reported to you in January on the 1099-NEC form we mentioned.
Sole proprietors are expected to pay estimated taxes four times per year that approximate the amount they might owe for each quarter. Unfortunately, there’s no foolproof way to know exactly what your tax bills will be. You’ll need to add up your income and expenses for the quarter, determine what your tax bracket will probably be for the year, and make an educated guess about what you’ll owe in taxes. You’ll then submit that amount to the IRS and to state agencies (if applicable) on a Form 1040-ES voucher, which you can get here.
If you don’t pay estimated taxes, you’ll be responsible for a full year’s worth of taxes when you file. The IRS will also attach a penalty to what you owe.
Tracking your income and expenses manually is challenging. We can get you set up with software that will automate your bookkeeping. Contact us to schedule a consultation – tax filing season is just around the corner.
ABOUT THE AUTHOR
BRANDI MCKAY + CLIENT ACCOUNTING SERVICES MANAGER
Brandi McKay is a Client Accounting Services Manager at Lutz with over seven years of experience in accounting. She is responsible for providing outsourced accounting services to clients with a focus in payroll compliance.
AREAS OF FOCUS
- Outsourced Accounting
- Tax & Payroll Compliance
- Healthcare Industry
AFFILIATIONS AND CREDENTIALS
- Medical Group Management Association, Past Member
- Nebraska Medical Group Management Association, Past Member
- MPA, University of Nebraska, Lincoln, NE
- BSBA in Accounting, University of Nebraska, Lincoln, NE
SIGN UP FOR OUR NEWSLETTERS!
We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.
13616 California Street, Suite 300
Omaha, NE 68154
747 N Burlington Avenue, Suite 401
Hastings, NE 68901