According to research by Lawrence Katz, Alan Kruger, and the U.S. Bureau of Labor Statistics, there are between 6.9 to 9.6 percent of independent contractors in the workforce. That’s about 10.5 million to 15 million workers who earn their living through independent contracting.
Some would say that independent contractors have a sense of freedom. They make their hours, control their work, and have more time for work-life balance. Compared to employees at a company, independent contractors are responsible for handling their taxes.
Yet, that’s when things can get tricky. Many freelancers struggle to identify the difference between self-employment vs independent contracting. While these may seem the same, there are some subtle differences in the world of taxes.
If you want to understand self-employed tax forms, 1099 MISC, and freelancer taxes in general, you need to know.
How Does the IRS Define an Independent Contracting
You are considered an independent contractor if an employer does not control your services. This means that no one other than yourself determines how you perform your duties or what kind of duties you have.
Independent contractors are not legally subjected to someone specifically outlining the details of their work, and no degree of an employer-employee relationship exists.
When you work as an employee, your payments are subjected to FICA (Medicare and social security tax). The employer will also withhold income taxes for you, whereas if you are self-employed or independent contracting, you will do this yourself.
What Are Common Tax Forms for Independent Contractors
There are a few forms that are typical for independent contractors to use for tax purposes. Based on your tax situation can use Schedule C, Form 1040 to report your nonemployee compensation income. This is primarily used for self-employment tax if your net earnings are more than $400. You must report your earnings to the IRS if you earned more than $600 as an independent contractor for the year.
Calculating Taxes for Independent Contractors
Since you don’t have an employer that automatically deducts taxes for you, it’s good to know how to calculate the taxes you owe. A general rule of thumb is a self-employment tax rate of 15.3% for your net earnings.
This number comprises the sum of Social Security tax at 12.4%. Then there is the Medicare tax of 2.9% on your net earnings. You can also use a self-employment tax calculator to plan your taxes and simplify things.
Make This Tax Season a Breeze!
Independent contracting is a classification of self-employment. You can be considered an independent contractor if you don’t have an employer. There are some additional taxes benefits for being classified as self-employed.
It’s a good idea to keep in mind that when you got to file your taxes. If you need help planning your taxes or choosing the proper tax classification, we can help.
Our dedicated team has been helping San Diego North County residents and business owners for years. Reach out today and make this tax season a breeze.