Paying Taxes As An Independent Contractor
For tax purposes, the IRS treats independent contractors as self-employed individuals. That means youre subject to a different set of tax payment and filing rules than employees.
Youll need to file a tax return with the IRS if your net earnings from self-employment are $400 or more. Along with your Form 1040, youll file a Schedule C to calculate your net income or loss for your business. You can file a Schedule C-EZ form if you have less than $5,000 in business expenses.
Youll also have to pay self-employment tax, which covers the amounts you owe for Social Security and Medicare taxes for the year. As of 2019, the self-employment tax rate is 15.3%. You can calculate your self-employment tax using Schedule SE on Form 1040.
An additional 0.9% Medicare surtax applies to high-income earners. For tax year 2020, the Medicare surtax applies to single filers and heads of household whose income exceeds $200,000, married couples filing jointly whose income exceeds $250,000 and married couples filing separately with income of $125,000 or more.
If as an independent contractor, you expect to owe $1,000 or more in taxes when you file your annual return, youll have to make estimated quarterly tax payments. These regular payments cover your self-employment tax and your income tax liability for the year.;The first quarterly tax payment for each tax year is due in April.;Subsequent payments are due in June and September, and then January of the following year.
Uncle Sam May Keep Your Refund
Generally, you dont need to file a federal extension if youre owed a refund unless youre also planning to request a state extension. While that means you wont have to worry about getting hit with a failure-to-file penalty, you cant put off your filing forever. The IRS gives you three years from the original filing deadline to submit your return and claim a refund. If you dont take action before then, Uncle Sam gets to keep your money. If you applied for state and federal extensions and youre expecting a refund, it doesnt make sense to delay your filing any longer.
Time is running out to get your return filed so its in your best interest to act quickly, especially if you owe the IRS money. Procrastinating only increases the amount of penalties and interest due, which can take an even bigger bite out of your wallet.
Contribute To Or Open An Ira By Tax Day
Contributions to a traditional IRA can be tax-deductible. You have until the May 17, 2021, tax deadline to;contribute to an IRA, either Roth or traditional, for the 2020 tax year. The maximum contribution amount for either type of IRA is $6,000 or $7,000 if you’re age 50 or older.;See all the rules here.
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Resolving Human Resources Issues
When you hired your caregiver, you went over all the details to make sure they were the right person to care for your family. You probably didnt think the requirements concerning maternity leave, employment contracts, hiring and termination issues or paid time off would become your area of expertise. But, as a household employer, all those human resource issues fall squarely on your shoulders. Expect to spend a good chunk of time familiarizing yourself with these issues so you can make sure youre following the best employment practices and complying with the law.
With all these tasks, its easy to understand how it will take 50 to 55 hours of your time. If you need someone to do it for you or just want to talk through some concerns, check out how Care.com HomePay can help.
Why Filing Early Can Make Sense
Even though many taxpayers file their tax returns on or by about April 15 every year, there is no need to put it off until the last minute. Indeed, filing an early tax return can make sense for a variety of reasons.
The IRS will begin processing tax returns for the 2020 tax year on Feb. 12, 2021. Even if you don’t file early, there are reasons to begin preparation as soon as you can.
Starting your filing process early gives you the time you need to collect the evidence needed to claim all of your deductions. You will avoid the headache of the middle of the night stress over figures and receipts. Your accountant will have a more flexible schedule and will probably be able to start working on your accounts immediately. Also, by filing early, you will short circuit would-be identity thieves.
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Help Filing Your Past Due Return
For filing help, call 1-800-829-1040 or 1-800-829-4059 for TTY/TDD.;
If you need wage and income information to help prepare a past due return, complete Form 4506-T, Request for Transcript of Tax Return, and check the box on line 8. You can also contact your employer or payer of income.
If you need information from a prior year tax return, use Get Transcript;to request a return or account transcript.
Get our online tax forms and instructions to file your past due return, or order them by calling 1-800-Tax-Form or 1-800-829-4059 for TTY/TDD.;
If you are experiencing difficulty preparing your return, you may be eligible for assistance through the Volunteer Income Tax Assistance or the Tax Counseling for the Elderly programs. See Free Tax Preparation for Qualifying Taxpayers;for more information.
How Do I File Taxes
You can file online yourself, potentially for free, or visit a tax professional.
If your adjusted gross income was less than $72,000 in 2020, you might qualify to file your federal return, and maybe your state return, at no cost through one of the IRS partners, regardless of how complicated your tax situation is. Also, most active duty military qualify for free filing. Check out your options here.
If your income exceeds $72,000, or you’re not interested in the platforms offered in partnership with the IRS, check out our list of the best tax software to use this year.
After filing out the required forms, your tax preparer will calculate whether you owe additional income tax or you’re getting a refund. If you don’t pay what you owe by May 17, penalties may apply.
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Can I Get An Extension Of Time To Pay My Tax
An extension of time for payment of tax can be filed with the IRS on Form 1127: Application for Extension of Time for Payment of Tax, but the legal requirements are strict:
- Form 1127 must be received by the IRS on or before the date that the tax is due.
- You must provide a complete statement of all your assets and liabilities at the end of the last month, and an itemized list of money you received and spent for the three months immediately prior to sending in the extension to pay request.
- You must demonstrate that paying the tax when due would result in undue hardship; simple inconvenience is not enough of a hardship to qualify.
- You need to show that paying the tax when due would result in a substantial financial loss and that you don’t have the cash, or can’t raise the money, by selling property or through borrowing.
When approved, extensions to pay are generally limited to six months. Plus, the IRS requires some acceptable form of security before granting an extension of time to pay. The security may be in the form of a bond, notice of lien, mortgage or other means, depending upon individual circumstances.
There are times when extensions are granted especially due to federally declared disasters. You can check for additional relief information on the IRS Disaster Relief page.
Filing Your Taxes: Diy Or Hire A Pro
If youre debating between filing your own taxes as an independent contractor or hiring a tax professional, consider your business income and expenses. If you have a straightforward tax situation with few deductions, then itll be less expensive to use a tax filing software yourself. On the other hand, if your business expenses are complex, you have a high income or subcontract work to other independent contractors, it may be worth the investment to hire a tax pro to avoid any mistakes or errors in your filing.
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How Do I Send The Irs My Tax Payment
If you’re mailing your tax payment, you can elect to have the funds withdrawn directly from your bank account or include a personal check or money order. If you choose the latter, make it payable to “US Treasury” and include your name, address, phone number, Social Security number or Individual Tax ID Number. Under no circumstances should you ever mail cash to the IRS.
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Researching Federal State And Local Laws To Stay In Compliance
Labor laws, payroll rules and tax requirements arent exactly light reading. But as a household employer, keeping up with those areas is essential. For instance, did your state just pass a Domestic Workers Bill of Rights that could impact the overtime laws in your area? Are you confused because your state requires different tax filing deadlines depending on how much in taxes you withhold from your nanny? Staying on top of current issues gives you the tools to stay in compliance with the law, but it requires some time and effort.
Read more about the specific requirements in your state.
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What Youre Required To Pay As A Self
Okay, with all of that knowledge in your head now, lets talk about what youre on the hook to pay to the government come tax time. When youre self-employed, and youre operating your business as a sole proprietorship, you must pay:
- Personal income tax on your business earnings minus business expenses
- Contributions to the Canada Pension Plan
- Contributions to Employment Insurance voluntary
Dealing With Economic Uncertainty
- The coronavirus pandemic has pushed millions into unemployment and the economy into a recession. Financial advisors can help navigate these troubled times. To simplify the search, use;SmartAssets free tool. It will match you with financial advisors in your area in just 5 minutes. If youre ready to find an advisor,;get started now.
- There are certain personal finance fundamentals that you need to get in order, ideally before a recession hits. Heres how to prepare for a recession.
- Extending the tax deadline isnt the only thing the government is doing to take the economic pressure off Americans. Learn what relief is available to you.
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Did Arizona Conform To The Federal Law
Yes. On April 14, 2021, Governor Ducey signed Senate Bill 1752, which conformed to the definition of federal adjusted gross income , including federal changes made during 2020 as well as through the 2021 American Rescue Plan. The bill does not add any new non-conformity additions or subtractions. However, additions and subtractions created for prior non-conformity adjustments for issues such as bonus depreciation are still in place.
2020 conformity includes the federal 2020 Cares Act, the federal Consolidated Appropriations Act of 2021, and the federal American Rescue Plan of 2021.
If You Have A Balance Due:
If you haven’t paid all of the tax you owe by the filing deadline:
- You’ll likely end up owing a late payment penalty of 0.5% per month, or fraction thereof, until the tax is paid.
- The maximum late payment penalty is 25% of the amount due.
- You’ll also likely owe interest on whatever amount you didn’t pay by the filing deadline.
If you didn’t get an extension,
- You are also looking at a late filing penalty of 5% of the unpaid tax per month, plus interest.
- The maximum late filing penalty is 25% of the amount due.
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File For An Extension By Tax Day
If you can’t finish;your return by the May 17 tax deadline, file IRS Form 4868. This will;buy;most taxpayers until Oct. 15 to file their tax returns. See more about how extensions work.Note:;A tax;extension gets you more time to file your return, not more time to pay your taxes. You still must pay any tax you owe, or a good estimate of that amount, by the tax deadline. Include that payment with your extension request or you could face a late-payment penalty on the taxes due.
Help Is Available If You Cant Pay
The IRS recognizes that there are certain situations where you may not be able to meet your tax obligations on time. If you file your return by the extension cutoff but you cant pay the full amount, you may be able to make monthly payments towards the balance through an Installment Agreement. Qualifying for a payment plan is fairly straightforward; you have to be up-to-date on your tax filing and owe less than $50,000. If youre eligible for an installment agreement, youll have 72 months to pay back what you owe.
As an added benefit, you may be able to get some or all of the penalties waived if you can demonstrate that your inability to file or pay on time was due to circumstances beyond your control. As long as you havent had any previous tax trouble and your returns for the prior three years were paid on time, the IRS may consider granting you an abatement, which can significantly reduce what you have to pay.
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How To Calculate How Much Youll Owe If Youre Self
Lets talk specifics here. You may think that you have to pay tax on every dollar your business earns, but thats actually not the case. Youre only required to pay income tax on your business earnings after business expenses. Moreover, you can lower your average tax rate and thus your tax bill even more by taking advantage of other personal tax deductions and tax credits, such as claiming some of your RRSP contributions as deductions.
Lets say youre a self-employed web designer in Ontario and you earned $100,000 in business revenue. Business revenue is the total amount of income your business generated by selling goods and/or services. Business revenue does not include any sales tax collected .
You spent $30,000 on business expenses and operating costs.
That leaves you with $70,000 in business earnings after expenses. Using this free tax calculator, youll find that your average tax rate would be 26.66%, and you should set aside $18,662 to pay your federal and provincial taxes and your CPP premiums.
Now, lets say you also contributed $10,000 to your RRSP which you claim as a tax deduction.
As you can see, your RRSP deduction lowered your average tax rate to 22.42%, thus decreasing your tax bill to only $15,697.
Freelance Taxes For Canadians
Ever since I started my side hustle, freelance taxes has been a major concern for me. I say major because I absolutely hate taxes. Despite the fact that I have a decent understanding of taxes, I just seem to have an irrational fear about them when;tax season rolls around.
Freelance taxes for Canadians applies to small businesses, freelancers, and self-employed individuals. All of the information you need can be found on the Canadian Revenue Agency website, but this post is meant as a quick overview when it comes to taxes for freelancers.
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How Do I Cancel The Payment And Schedule It For A Later Date
Payments can be canceled until 5:00 pm on the business day prior to the requested withdrawal date. Payments that can be canceled include payments made through e-filed returns and payments made on AZTaxes.gov.
Payment through vendor: If the payment was scheduled through an electronic filing program, visit www.AZTaxes.gov, select Cancel a Payment, and select Efile as the Payment Type. Data required is SSN, filing status, tax year and payment amount.
Payment by individual: If the payment was scheduled on AZTaxes.gov, select Cancel a Payment, then select the Payment type. A confirmation number is required. For payments by paper, ADOR will process the check when it is received and does not hold it for processing at later dates. For paper checks, remember to include the following:
- Tax ID
- Tax Period
How Is Independent Contractor Income Paid And Reported
Employees typically get paid on a consistent schedule, such as weekly, biweekly or monthly. As an independent contractor, its up to you and the payer to come to an agreement on when youll be paid and how that transaction will take place. For example, the payer may mail you a check, pay you via wire transfer or send payment through an ACH deposit.
These payments are not considered a salary or wages for tax purposes because the vendor doesnt deduct taxes. That means no federal income taxes, Social Security taxes or Medicare taxes are taken out before you receive the money. Be mindful of how you decide to receive the payment though some services like PayPal may charge a fee.
Come income tax season, the payer is required to send you a Form 1099-MISC reporting all of the income they paid you the previous calendar year. This Form 1099-MISC takes the place of a W-2, which traditionally employed individuals receive from their companies. There is one exception to this rule though. If you earned less than $600, you still must report the income, but the payer doesnt have to send you a Form 1099-MISC. If you work with multiple people or businesses throughout the year, you may receive multiple copies of this form. Payers are required to have these completed and postmarked by the end of January each year.
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