When you work for someone else: they handle the tax withholdings. State taxes, federal taxes, Social Security, and Medicare are all taken care of automatically. You’ve probably seen these withholdings on your pay stub. But as an independent contractor, you receive the full payment for your work with no taxes withheld.
The extra cash in hand might seem great at first, but it leaves you vulnerable to take care of your own tax obligations.
Here’s what this means for you: You’ll need to set aside money from each payment to cover your tax responsibilities. Most financial advisors recommend setting aside 25% to 30% of your income for tax purposes.
Many contractors find keeping these funds in a separate business bank account helpful. This way, you won’t be caught short when the filing deadline says it’s time to pay your independent contractor tax dues.
Independent contractor taxes and liability
When you’re self-employed, you’re running the show, including your own business’s payroll department. You’re responsible for two main types of tax responsibilities: self-employment tax and income tax.
Self-employment tax
Self-employment tax covers FICA (Federal Insurance Contributions Act) contributions — the federal payroll taxes that fund Social Security and Medicare. While traditional employees split these costs with their employer, you cover the full 15.3%, which breaks down to:
- 12.4% for Social Security
- 2.9% for Medicare
The good news is that the Internal Revenue Service (IRS) lets you deduct half of your self-employed contributions as a business expense when calculating your adjusted gross income.
Income tax
Your income tax is based on your total yearly earnings minus deductions. It includes all forms of compensation:
- Cash payments
- Virtual currency (including cryptocurrency)
- Goods and property
- Other forms of payment
For a complete list of what counts as taxable and non-taxable income, visit the IRS website before filing taxes as an independent contractor.
How to pay taxes as an independent contractor
Without an employer to handle tax withholdings, tax responsibilities fall squarely on your shoulders. Instead of a single payment on tax day, the IRS expects you to make quarterly payments to stay current.
It’s called an “estimated” payment because you estimate how much income you’ll earn and pay taxes based on the estimate.
You’ll need to make quarterly tax payments if you meet both of these requirements:
- File as a sole proprietor, partner, or corporation; and
- Expect to owe $1000 or more when you file
When to pay estimated taxes
Estimated taxes are due four times per year. Mark these important dates on your calendar since missing a payment could result in penalties:
- April (for January to March income)
- June (for April to May income)
- September (for June to August income)
- January of the following year (for September to December income)
Many independent contractors and small business owners use these quarterly tax due dates as checkpoints to evaluate their overall business health. While you’re looking at the numbers, take a moment to review your business coverage, too. Your protection needs might change as your income grows or you add new clients.
Here’s a quick look at common business insurance types that can help protect you:
At the end of the year, check your coverage to make sure it matches any changes in your business, such as new clients, locations, or services.
Calculate your independent contractor tax payments
When it comes to calculating your estimated tax payments, you’ve got a few options:
- Form 1040-ES, which includes a worksheet and vouchers for mail-in payments (or you can pay online).
- Online estimated tax calculators (like this one from Turbotax).
- Accounting software that does double duty by calculating the tax and filing returns.
You’ll get a tax refund if you’ve paid too much estimated tax. And if you pay too little, you’ll owe the difference when you file your annual return.
Common IRS forms for independent contractor taxes
All IRS forms discussed here come with instructions that explain how and when to complete them. Of course, the final word comes from the IRS website, which has up-to-date tax information for self-employed professionals.
1099 contractor forms
Independent contractors get 1099s instead of W-2s. Clients who pay you more than $600 must send either Form 1099-NEC (nonemployee compensation) or Form 1099-MISC.
In a perfect world, adding up all of the 1099 forms you receive will equal your annual gross income. But don’t rely solely on your 1099s. You must track all income yourself — you’re responsible for reporting everything you earned, even if you don’t receive a 1099. This includes payments under $600 and income from clients who fail to send forms.
Form 1040
Form 1040 is your main return. Much of what goes on Form 1040 comes from the tax schedules below.
Schedule C
Use Schedule C to report your income and expenses. It helps determine whether your business earned a profit or reported a loss for the year. It’s also where you’ll list valuable business deductions to reduce your taxable income. The tax deductions you can claim vary based on your type of business, but typically include:
- Industry-specific equipment and tools
- Office furniture and computers
- Phone and internet expenses
- Business insurance premiums
For example, suppose you’re a licensed contractor. In that case, you can deduct the cost of tools and equipment you need to replace siding, repair roofs or install cabinets, and premiums for your contractor insurance.
Likewise, personal trainers can deduct personal trainer insurance premiums, along with the fitness equipment used to whip clients into shape.
Remember, you can deduct the employer portion of FICA taxes and can typically deduct any business insurance premiums you pay, no matter what type of business you run.
Tip: Learn about 16 amazing tax deductions independent contractors may qualify for. These include deductions for office expenses, car mileage, health insurance, and even hiring a certified public accountant (CPA).
Schedule SE
Schedule SE form calculates your self-employment tax — the Social Security and Medicare taxes you owe based on your Schedule C income. Think of it as the self-employed version of FICA withholdings. Here are the key points:
- You’ll pay this tax on your net earnings (profit calculated on Schedule C).
- The total rate is 15.3% (12.4% for Social Security, 2.9% for Medicare).
- This tax applies regardless of age, even if you’re already receiving benefits.
- You can deduct half of your self-employment tax on Form 1040.
Changes for independent contractor taxes for 2025 and beyond
A significant change is coming for the 2025 tax year: it’s the last opportunity for the Qualified Business Income (QBI) deduction, also known as Section 199A.
This valuable tax benefit lets independent contractors deduct up to 20% of their qualified business income, but it ends December 31, 2025. If you’ve been using this 20% deduction to reduce your taxable income, now’s the time to plan for its expiration.
Not new this year, but an important change from recent years, is the rule about business meal deductions. While restaurant meals were 100% deductible in 2021 and 2022, we’re back to the standard 50% deduction as of 2023.
Another relatively new change from 2023 is the reporting threshold for those who use Form 1099-K. Payment processors must send 1099-Ks to contractors only if they receive over $20,000 and have more than 200 transactions. It affects you if you:
- Are paid via credit, debit or payment cards
- Utilize payment apps (like PayPal)
- Work through online marketplaces (like Upwork)
Given the complexity of tax filing requirements and the upcoming QBI expiration, consulting a tax professional is a good idea.
What do I do if I get a 1099 Form from a client?
You may receive a 1099 form from a client during tax season if you’re a freelancer or independent contractor. You’ll likely receive many 1099s if you work with multiple clients.
If your small business or sole proprietorship is a limited liability company (LLC), chances are you’re paying taxes on your earnings as a pass-through entity. Your taxable income comes from your earnings from your services or products, and your accounting software already tracks all the money you’ve earned through invoices — the 1099s are just confirmation of income you’ve already recorded.
Think of 1099s like a receipt. They’re proof of payment, not a new source of income to add to your total. Your actual taxable income comes from all your earnings throughout the year, whether you received a 1099 or not.
Always consult tax professionals about tax-related questions, especially on how you classify your business.
How to file taxes as an independent contractor
You must file a federal income tax return if you earned $600 or more during the year. (In some cases, you might need to file even if you earned less.) We created an in-depth guide to small business taxes for beginners. But here are the basic steps for how to pay taxes as an independent contractor:
1. Gather your documents
Most 1099 workers are sole proprietorships. That means your business income becomes part of your personal income.
If you’re running your business as a sole proprietor, your default taxpayer identification number is your Social Security number (SSN). But if you have employees and applied for an employer identification number (EIN), you’ll need this number to meet tax requirements.
Gather all of the necessary documents for both your personal and business income. This might include:
- All 1099 forms from clients
- Records of income without 1099s
- Your Social Security number (or EIN)
- Income records from paid invoices
Remember, even if the people you work for are sloppy with their paperwork, the IRS makes it your responsibility to report payments and income you receive during the year.
2. Organize your records
Gather your income documents first — then tackle those expenses. Here’s where solid record-keeping pays off. Every receipt, proof of transaction, and record counts when it’s time to claim deductions and lower your tax liability.
Just make sure to keep receipts. If you get audited, the IRS will want to see them.
3. File taxes yourself via a tax professional
We recommend working with a licensed tax professional to ensure you file correctly and help avoid IRS penalties. Plus, a pro can give you advice on your estimated taxes or setting up your accounting system.
But maybe your business taxes are pretty simple, or your business hasn’t changed much from last year. If that’s the case, you could take a crack at filing yourself.
When you go this route, you can mail or submit your tax forms online. You can download the forms from the IRS’s site if you choose the paper route. Local libraries and post offices often have free copies of the form for taxpayers, too.
You can also e-file directly by creating an account on the IRS’s website or using commercial tax preparation software.
