What Is an Independent Contractor?
An independent contractor (IC) is simply someone who works for someone else but not as an employee. An employee is someone who works for a business, and the business controls what will be done and how it will be done.
Tax Deductions for Independent Contractors
Deductions lower your taxable income for the year. Independent contractors claim them as business expenses on their taxes. Depending on the kind of business you own, your deductible expenses might include:
- Advertising costs
- Business insurance
- Vehicle-related expenses
- Legal expenses
- Home office expenses
- Rent or lease payments
- Equipment purchases
Independent contractors can also claim a deduction for health insurance premiums they pay out of pocket. That includes premiums paid for medical, dental and long-term care insurance. If you pay for your spouse’s and children’s insurance, you may be able to deduct those costs, as well. The exception to the rule is that you can’t deduct premiums for health insurance if you have access to a spouse’s insurance plan.
As an independent contractor, you can also deduct personal expenses, such as mortgage interest paid, interest paid to student loans and real estate taxes. You can also get a tax break for contributing to a self-employed retirement plan or a traditional IRA. If you’re looking for a retirement plan option, consider a SIMPLE IRA, SEP IRA or a solo 401(k). These plans allow for deductible contributions, with qualified withdrawals taxed at your ordinary income tax rate in retirement.
How to file taxes as an independent contractor
1. Gather 1099 forms from your employers
Starting with the 2020 tax season, Form 1099 comes in a few different flavors, though each variation serves the same purpose of recording and reporting your income. Most contractors should receive Form 1099-NEC (nonemployee compensation). However, you could receive a 1099-K if you worked for a business that paid you at least $20,000 over a course of at least 200 individual payments.
2. Calculate your business deductions
- Home offices
- Educational materials and experiences, including seminars and conferences
- Gas expenses for business-related traveling
- Health insurance
- Internet and phone costs
3. Fill out your tax forms
- Form 1040. This form reports your individual income to the IRS. Sole proprietors, freelancers, contractors, and any other self-employed persons will file their income taxes with Form 1040.
- Schedule C. This form attaches to Form 1040 and breaks down your business’s profits and losses over the course of the year.
- Schedule SE. This form also attaches to Form 1040. It helps you calculate the self-employment tax, or the combined Social Security and Medicare taxes all contractors are required to pay. The self-employment (SE) tax is 15.3% of your annual income.
4. File your taxes
As for paying your taxes, the IRS’s online payment portal gets the job done the quickest. If you’re using tax software, you should be able to pay through the software itself. And if you’re working with an accountant, they can help you make the payment.
The Bottom Line
Working as an independent contractor can be a great way to earn a living for people who desire flexibility, don’t mind inconsistent earnings, and who can manage their time while potentially juggling multiple clients.
In addition, independent contractors must be comfortable with filing their taxes quarterly with the IRS and paying for their own insurance, plus retirement savings. For some, the freedom to choose projects, and the flexibility of working for themselves, make the challenges worth it.