An independent contractor can also be called as self-employed or someone who is an independent business person. It’s really just getting paid for your work in a different manner. For people who became an employee and have now become self-employed as an independent contractor, they will notice a difference in how they file their taxes.
If you want to know to pay yourself, how you must pay taxes on your business income, and how you can save money on your business taxes through business expenses deduction, then this article is for you.
When a person works for someone else, but not as an employee, he is called an independent contractor. That person is considered a sole proprietor for income tax purposes. The default form of small business is the designation of “sole proprietor”. It’s not necessary for that person to register his business with the state of with the IRS, and incorporating is not necessary (forming a corporation).
The payments that you receive from the work you do in your business are not a salary or wages but they shall be called business income. Your business will not give you a salary. Your business check account will contain the money you receive for your work or your products and take money out of the business but as an owner. You are not taking away salary as you are not an employee.
Your taxes won’t be affected by the amount you take as an owner and whether you take the income of your business or not, you must pay tax for all of it.
The payments you receive from your business don’t have any federal income tax withholding taken from them because you aren’t an employee. Your social security or Medicare won’t be affected as well.
Through the business tax return, you can pay federal and state income tax on your income from your work as an independent contractor. There’s no running away from paying taxes. You also need to pay for your social security and Medicare taxes. This combination of taxes is also known as self-employment tax for independent contractors.
Any typical business expenses that you have paid can be deducted. However, it is important that for any expenses, there is a corresponding excellent record made at the time the expenses were incurred to show the business expense and the amount for audit purposes.
You can deduct as many legitimate expenses as you can but the money you spent must have proof that you spend it for the purpose of business.
Expenses that have a specific business purpose are the only ones that can be deducted according to the IRS. These expenses must, therefore, be clearly for your business, not personal, in order for them to be deducted. The expenses must also be documented with the date, amount, and business purpose.
You will receive a 1099-MISCC form showing the total amount you earned from each client for who you worked during that year instead of receiving a W-2. If any of your clients paid you less than $600, you won’t receive a 1099-MISC form. However, the amount you were paid on your business tax return must still be included.
The net income from all of your business activities must first be determined to find out how much income taxes you will pay as an independent contractor. Schedule C records the income from your work as a sub. You must list the income from your work as an IC and then have the deductions taken in order to get a net income number. Your Form 1040 shows this number to Line 12. If you have any other income, it will be added to it and the calculation of your tax based on your total adjusted gross income.
You may want to consider consulting a tax professional who can help with filing your taxes. You can save a lot of time and a good amount of money if someone experienced in taxes can assist you with your tax application.
Valderas Financial Solutions LLC