According to the IRS, the general rule is that you are an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Being an independent contractor is being self-employed and therefore, you must file a Schedule C to report business income when filing your individual tax return.
As a self-employed individual you are subject to self-employment tax (Social security and Medicare taxes) on the net profit of your business, (excluding church employee income) for income of $400 or more. To figure out your net profit, subtract your deductible business expenses from your business revenue.
An Additional Medicare Tax may apply if your earning exceeds certain thresholds depending on your filing status. If you have both wages and self-employment income, the Additional Medicare Tax may be reduced but not below zero. Use Form 8959.
You are also responsible for Federal income tax which is a pay-as-you-go-tax. Employees have income tax withheld from each paycheck, as an independent contractor if you don’t have any or not enough tax withheld throughout the year, you must pay estimated tax payments. If you have an employer, you may avoid having to pay estimated taxes by having your employer withhold more tax from your earnings by updating Form W-4 with your employer.
Estimated tax payments are generally made when you expect to owe $1,000 or more when you file your personal tax return. A good rule of thumb is to set aside about 30% of your freelance income to cover taxes. Use Form 1040-ES if mailing in payment; or pay electronically using the Electronic Federal Tax Payment System (EFTPS). Estimated tax payments are due on the 15th of April, June, September and January.
A penalty may be imposed on you if you did not pay enough income tax to meet at least the smaller of:
- 90% of your current year tax due, or (22.5% per quarter)
- 100% of your previous year tax due. (must cover a 12-month period) or (25% per quarter)
Penalties are also calculated not only annually but also by period (or quarterly). You will still owe a penalty if your estimated payment plus your withholdings for the period and overpayments applied from previous periods did not meet minimum required.
Your total 2017 (last year) taxes were $2,584. You expect to owe $3,000 for 2018 (current tax year).
You must have paid by end of year at least 90% of expected tax due $2,700 (90% x $3,000) or 100% of previous year taxes ($2,584). You should have also divided these quarterly, to avoid any period penalties.
In April you should pay at least $675 ($3,000 ÷ 4 = $750 x 90% = $675) Expected tax due divided by 4 quarters multiplied by 90%.
In June you should make another payment of $675. By the end of second quarter, you paid a total of $1,351 ($675 for 1st quarter and $675 for second quarter). Let’s say you had extra money in June and instead of paying only $675 which was due, you paid $800.
In September you could only pay $550. Quarterly payment due is $675 but you overpaid last quarter by $125 ($800 - $675= $125 overpayment). This quarter to avoid penalties you should have a total of 67.5% paid in from total expected tax due. (22.5% x 3 = 67.5%) 22.5% per period and we are on our third quarter. ($3,000 x 67.5% = $2,025). This is what you have paid $675 +$800 +$550 = $2,025.
As an independent contractor, expect to receive Form 1099-MISC from parties you have worked for. If you work with subcontractors; you must provide them with Form 1099-MISC to report payments of $600 or more, made by you to them, paid either by direct deposit or check over the course of the year for their services by January 31st. File Form 1096 to report subcontractor payments to IRS by January 31st. If subcontractors were paid via credit card or by a third-party entity such as PayPal or Square, you don’t need to report this on Form 1099-MiSC; the settling company will provide them with 1099-K.
Excise Taxes are paid when purchases are made on some specific goods, such as gasoline, tobacco, alcohol, indoor tanning, airline tickets, sport fishing equipment and tires. Excise taxes are often included in price of product.
Excise taxes are similar to sales tax except that it only applies to certain goods and is a flat tax applied before the purchase price. These taxes are applied at federal level but also at state level which vary by state. Taxpayers are responsible for remitting these tax payments to the federal government, depending on the circumstances, up to once a quarter by filing Form 720 or Form 8849 whichever applies to the situation.
If April 15 comes around and you are not ready to file your taxes, request an extension to file by filing Form 4868. This extension is to file, but you still need to make payment on time, it allows you to extend filing until October 15th.