As an independent contractor, you have the freedom to set your own hours, choose your clients, and even work from home. However, this freedom also comes with added responsibilities – including paying taxes.
Unlike traditional employees who have their taxes withheld by their employer, independent contractors are responsible for paying their own taxes. This can be a bit overwhelming for those who are new to the world of freelancing. Here’s what you need to know about how much taxes you’ll need to pay as an independent contractor.
The first thing to keep in mind is that, as an independent contractor, you’ll need to pay self-employment tax. This tax is a combination of Social Security and Medicare taxes and is calculated based on your net earnings. In 2021, the self-employment tax rate is 15.3% of your net earnings. However, you can deduct half of this on your tax return as a business expense.
In addition to self-employment tax, you’ll also need to pay income tax on your earnings as an independent contractor. The amount you owe will depend on your tax bracket and other factors such as deductions and credits. It’s important to keep track of your income and expenses throughout the year so you can accurately calculate your tax liability come tax time.
Estimated Tax Payments
As an independent contractor, you’re not only responsible for paying taxes on your income but also for making estimated tax payments throughout the year. These payments are due quarterly and are based on your projected income for the year. If you don’t make these payments or underpay, you may be subject to penalties and interest come tax time.
To determine how much you should be paying in estimated tax payments, you can use the IRS’ Form 1040-ES. This form will help you calculate your estimated tax liability based on your projected income and expenses for the year.
As an independent contractor, you’ll need to allocate a portion of your earnings to taxes. While it can be a bit daunting at first, understanding how much you need to pay and when can help make the process smoother. Keep in mind that tax laws can change, so it’s important to stay up-to-date and consult with a tax professional if you have any questions or concerns.