how to pay taxes as an independent contractor
in the united states independent contractors are considered sole proprietors or single member limited liability companies llcs they must report all their income and expenses on schedule c of form 1040 or schedule e if they have profits or losses from rental properties further they must submit estimated taxes to the irs usually every quarter using form 1040 es 15however as sole proprietors independent contractors do not necessarily pay taxes on their gross earnings applicable business expenses can reduce their overall tax obligation the difference between gross earnings and business expenses is the net income on which taxes are due for the 2024 tax year independent contractors pay 12 4 in social security contributions on the first 168 600 of net income and 2 9 in medicare taxes on all net income 6 single filers must pay an additional 0 9 medicare tax on self employment income that exceeds 125 000 if they are married and filing separately 200 000 if they are married and filing jointly and 200 000 if another tax status applies to them 7some independent contractors may also need to pay state sales taxes for producing products but it can depend on the type of product being made independent contractors have access to alternative retirement plans such as a sep ira simple ira and solo 401 k however they must fund them all by themselves and they have no access to unemployment insurance or workers compensation payments 8910advantages and disadvantages of being an independent contractorthe pros of being an independent contractor generally relate to the greater freedom they enjoy they can set their hours pursue work they love and decide what work they will and will not accept those who can work from home may save money on transportation and the wardrobe needed to work in an office they may also get the home office tax deduction that allows them to deduct the business portion of their bills for such things as insurance rent repairs security systems and utilities and services 11independent contractors have complete control over building their business from hiring and firing to choosing clients unlike employees who have a set annual salary there s no limit on how much money they can earn finally they can enjoy a sense of pride and accomplishment in building a successful business enterprise that belongs to no one but them the cons of being an independent contractor are related to the risk of going bankrupt and the opportunity cost of a regular career they aren t supported by a regular salary when business is terrible and their income can be unpredictable and highly volatile this income fluctuation can cause stress and make it harder for independent contractors to qualify for mortgages car loans and other types of loans they are responsible for all business costs no reimbursable expense reports for them and if working alone they lack the support and camaraderie of coworkers independent contractors are not eligible for employer provided healthcare plans so they must completely fund their healthcare they must also pay both the employee and the employer parts of social security and medicare taxes what s known as the self employment tax 12 they are not eligible for employer sponsored 401 k plans or matching contributions from those who employ them can set their own hours and choose their own worknot limited by an annual salary as to how much money they can earncan save money by working from homeresponsible for all of their business expensesmust fund their own healthcare and retirementaren t eligible for unemployment insurance or workers compensationexample of an independent contractorone example of an independent contractor would be an interior designer who works for themselves and has a roster of clients who hire them to decorate their homes the interior designer might even work on a contract for an architectural firm that employs them to work closely with their clients throughout the building process of a new home the designer an independent contractor would do whatever job is set out in the agreement and bill the architectural firm with whom they are contracted to work either an hourly or flat rate for the work executed to get paid what is owed the designer must send its client the architectural firm invoices at the same time the interior designer might be working for other clients and working on various homes simultaneously the alternative would be working as an in house designer and only working for clients of the architectural firm that employs the designer 