Incorrectly classifying an employee as an independent contractor could trigger a tax penalty. Employees typically get paid on a consistent schedule, such as weekly, biweekly or monthly. For example, the payer may mail you a check, pay you via wire transfer or send payment through an ACH deposit. 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 MISC reporting all of the income they paid you the previous calendar year. There is one exception to this rule though. 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.
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in coming up with the determination.
The form may be filed by either the business or the worker. Be aware that it can take at least six months to get a determination. A business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 PDF. Once a determination is made whether by the business or by the IRS , the next step is filing the appropriate forms and paying the associated taxes.
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker the relief provisions, discussed below, will not apply. Ways to Self-Finance Your Business.
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Best High-Speed Internet Providers. Best Business Security Systems. Marketing services. The IRS has extended the individual tax-filing deadline to May 17, We updated the information on this page to match. We also revised this guide to include more useful information for independent contractors filing this year. We updated this piece with the latest statistics and research that freelancers need to file their taxes in Below, we walk you through the tax-filing process.
Tax form NEC nonemployee compensation lists the income you earned as an independent contractor working for a specific business. Starting with the tax season, Form comes in a few different flavors, though each variation serves the same purpose of recording and reporting your income. Most contractors should receive Form NEC nonemployee compensation.
Many of these expenses can be deducted from your total taxable income, which lowers the amount of taxes you owe. Depending on the type of business you run, you should consider making deductions in the following categories:. Independent contractors may be people who work in professions—dentists, doctors, or attorneys.
They may also work in such trades as plumbing, building contracting, or electrical work. They may also include other types of service workers or gig workers such as rideshare drivers or freelancers. As an independent contractor, the Internal Revenue Service IRS considers you self-employed, in business for yourself, rather than an employee of someone else.
As a self-employed individual who is in business as a sole proprietor, you have several types of taxes to pay:. Everyone who works in the U.
For independent contractors and others who are self-employed, these taxes are called "self-employment taxes. These taxes are based on your business's net income profits.
The self-employment tax rate is You can take a deduction for half of the total, equal to the amount that an employer would pay for these taxes.
Each year, the Social Security part is capped at a specific maximum. Self-employment income is used for Social Security credits each year. Independent contractors are considered to be business owners.
The government requires that you include on your return any personal income you make from your business, along with business tax deductions.
Most independent contractors are sole proprietors or single-member LLCs who report their federal income taxes on Schedule C as part of Form Calculate your business income, and take deductions on Schedule C to find your net profit or loss total that is added to other sources of income from employment or investments, for example to get your net taxable income for the year. If you received a Form NEC from a customer showing payments made to you and tax withheld as part of your business income, you must include that income on Schedule C and report it on your tax return.
You must also report and pay state income taxes on your business income in most states. You must pay estimated taxes during the year to avoid penalties for underpaying. In most years, and for most taxpayers, the due dates are April 15, June 15, September 15, and January 15 of the next year.
Due to the tornado in December , taxpayers in parts of Kentucky were also granted extensions. You can consult IRS disaster relief announcements to determine your eligibility. If you have employees, you must withhold federal income taxes from employees, pay several types of employment taxes, and file tax reports to the IRS and the Social Security Administration SSA.
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