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How Do Independent Contractor Fees Work?

How Do Independent Contractor Fees Work?

The IRS considers an independent contractor as a self-employed or an entity hired to provide a service or work for another entity as a non-employee. Due to that, independent contractors pay their own Social Security and Medicare taxes, unlike employees whose employers pay their expenses. In addition, the employer does not provide independent contractors with employment benefits like health insurance or employer-sponsored retirement accounts, which are given to employees under the company. The employer must specify and treat everyone as either an employee or an independent contractor. An independent contractor can also be considered a freelancer. So, you will file the tax return based on earnings at the end of rendering the service or work.


Understanding Independent Contractors

Whether you're a doctor, lawyer, uber driver, veterinarian, dentist, or other professional that provides independent service to people or employers for a certain period are titled by the Internal Revenue Service (IRS) as an independent contractor. The term also captures contractors, subcontractors, actors, musicians, auctioneers, web designers, software designers, writers, and other occupations independently providing services to the public without being fully enrolled with the company. Recently, more people have been branching to become independent contractors instead of full-time employees. The gig economy accommodates these types of people.

As an independent contractor, the IRS expects you to keep a record of your earnings, including any payment made by a client. On the other hand, the client is to issue you a 1099-MISC form after paying the earnings. However, an employer paying an independent contractor more than $599 for service must issue the contractor a 1099 form displaying their total annual revenues. The independent contractor determines the level of freedom and risk of working.

   

How Independent Contractors Pay Tax

The United States tax system considers independent contractors as sole proprietors or single-member of limited liability companies (LLCs). The Schedule C of Form 1040 is where they can state their earnings and expenses for the year. But they can use a Schedule E form if they accrue losses or profits on rental properties. In addition, the IRS awaits their self-employment taxes which are collected quarterly in form 1040-ES.

But the taxes paid by sole proprietors and independent contractors are not necessarily from their gross earnings. There are business expenses that reduce their total tax liability. The tax levied on the net income is the difference between their gross income and business expenses for the entire tax year. 

The tax rate depends on the product in question. For example, in the 2022 tax year, independent contractors contribute 12.4% to their Social Security for their first $147,000 net income. They also remit 2.9% in Medicare taxes from their total net income. However, those filing as a single entity must remit additional 0.9% Medicare taxes on self-employment income above $200,000 (married couples filing jointly are to file anything above $250,000)—also, some states levy sales taxes on independent contractors with products.


How Do You Fill out a W9 as an Independent Contractor?

As an independent contractor, your employer will ask you to file a W-9 for services rendered. The form needs accurate information such as age, address, and tax identification number. You can get a copy of the W-9 on the IRS website, plus the steps needed to fill it out.


How Do You Fill out a 1099-MISC Form for an Independent Contractor?

Also, the form is available on the IRS website. The form has 17 boxes to be filed, including the employer's name, address, and tax identification number. You are also expected to input your information, such as an address, age, and tax identification number. There are step-by-step instructions to follow on the IRS website.


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