Filing taxes as an independent contractor

Driving for Uber, delivering meals for DoorDash, designing websites as a freelancer, or even working as an independent distributor for a direct- or multi-level marketing company — there are all kinds of independent contractor jobs available today. With this type of work comes a whole new set of tax responsibilities. If the concept of “independent contractor taxes” is new to you, we encourage you to read on. There’s a lot to consider.

First things first – independent contractor taxes are different than when you’re a W-2 employee. With independent contractor work (sometimes called gig work or self-employment), our clients will ask “why was no federal income tax taken out of my paycheck?”

This is not a mistake. As an independent contractor, you’re required to pay your federal and state (if applicable) taxes to the Internal Revenue Service (IRS) and state revenue departments on your own, so they are not withheld from your paycheck. Wondering how you’re supposed to figure that all out? Rest easy; we’ve got you covered. 

In this post, we’ll touch on the difference between independent contractors and employees. Plus, we’ll cover important elements of independent contractor taxes, such as self-employment tax, quarterly estimated tax payments, and independent contractor tax deductions.

Working as an independent contractor after a job loss? Be sure to visit our  Unemployment Resource Center for helpful articles and information.

How do you know if you’re an independent contractor and not an employee? It has to do with whether you or the business that pays you has more control over the details of your work. Consider these questions: Who has the right to control your behavior at work and the financial aspects of your job—or is that something the company decides for you? If you’re not sure, review our post on how to know if you’re an employee or independent contractor. 

What if you work as an employee AND an independent contractor? These additional tax responsibilities will generally still apply, so don’t stop reading just yet. You’ll thank yourself when it comes time to file.

Independent contractor taxes: Important concepts

Don’t wait until tax time to find out about your tax responsibilities and considerations. The more you can plan for these items, the easier it will be on you to file your tax return. Plus, you could also save yourself from a larger than expected tax bill.

• Self-employment tax – This is how you cover Social Security and Medicare taxes for yourself. In an employee-employer situation both parties pay a portion of these taxes. Since you’re self-employed, you’re responsible for both halves. You’ll actually get to deduct one half of the taxes which is equivalent to the employer portion when you file your tax return. To look at the numbers, read our post on self-employment tax (SE tax).
• Quarterly estimated taxes – Again an employee-employer comparison is helpful here. Employers typically withhold taxes from employee paychecks each pay period, so taxes are paid as the year goes on. As a self-employed person, you’ll pay estimated taxes as you go too – just on set dates four times a year. Here’s where you can find those estimated tax payment dates. Estimated taxes include both income and self-employment taxes.
• Independent contractor tax deductions – This will largely depend on what you do for a living. For example, a freelance web designer may not have any mileage expenses, but they could have home-office expenses to deduct. Review the examples in the independent contractor deduction list below to see what types of tax benefits may apply to you.
• Tax deductions for self-employed individuals
  • Deduction for one half of self-employment tax
  • Self-employed health insurance deduction
  • Qualified Business Income Deduction
  • Car and driving related deductions – Mileage or actual expenses
  • Home-office deduction
  • Internet and phone
  • Licensing and fees
  • Advertising

Wondering what other independent contractor tax deductions you can claim? Whether you work with a tax pro or choose H&R Block Online, we’ll help you determine the tax credits and deductions that apply to you. 

How to file taxes as an independent contractor

To complete your taxes, you’ll need to gather all your forms and use them to complete certain forms on your return.

Common tax forms you could receive – Depending on your job type, you may receive a 1099-K or a 1099-NEC (before tax year 2020, you would have received a 1099-MISC).  You’ll need to report information from these forms on your individual tax return.

Note: Businesses are now required to send you a 1099-K if you were paid more than $600 for goods or services. Generally, even if they don’t happen to send you the forms, you still need to report the income to the IRS.

Forms you may need for filing – If you are filing taxes as an independent contractor, you are considered to be self-employed – even if you didn’t formally start your own business. As a proprietor of that business, you should file your independent contractor taxes on a Schedule C (Form 1040) to properly report your income and claim related expenses.

To calculate the self-employment taxes mentioned above, you’ll use Schedule SE. You’ll need to file Schedule SE if you have at least $400 in net income from self-employment.

If you have a business entity other than a sole proprietorship or a single member LLC, you’ll need to file a business return instead of reporting your business income on Schedule C. Examples include partnerships (Form 1065) and S corporations (Form 1120S).

There may be other IRS forms you’ll need to file, depending on the deductions you take.

Are there tax nuances for direct sales distributors?

No, if you are an independent consultant or distributor for a direct sales or multi-level marketing company you are also required to report your income on Schedule C (Form 1040). As explained earlier, if you have net profits of at least $400 you’ll also need to file Schedule SE.

Schedule C is used to report your net income from self-employment. Net profit from the activity is subject to the 15.3% self-employment tax you report on Schedule SE, which functions in a similar manner as Medicare and Social Security taxes employees would have withheld from your wages.

Getting help with independent contractor taxes

We know independent contractor and direct sales taxes can be tricky. But with H&R Block on your side, you can feel confident as you file your taxes.  

Ready to file? Take control of your taxes and get every credit and deduction you deserve. File with:

• H&R Block Online Deluxe (if you have no expenses) or
• H&R Block Online Premium (if you have expenses).