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Tax Tips for Independent Contractors

Information for Self-Employed Persons


For Federal income tax purposes, it is important to know whether you are an employee or an independent contractor.

Employee vs. Independent Contractor

The IRS defines independent contractors as follows:

“People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is 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. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.”

Workers who offer their services to the general public or to other businesses are usually considered “independent contractors” rather than employees. The governing rule is whether the payer has the right to control the details of what work will be done and how it will be done. If the payer only has the right to control the result of the work, then that payer is not an employer and the worker is not an employee — instead, the worker is considered to be an independent contractor.

If you are an independent contractor, you are considered self-employed.

If you are uncertain whether you are an employee or an independent contractor, you can use Tax Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to determine your correct status.

For more information about employees versus independent contractors, please see IRS Publication 15-A (Employer’s Supplemental Tax Guide).

Tax Forms for Independent Contractors

Taxpayers who are independent contractors are considered self-employed and must comply with Federal self-employment tax rules. You are considered self-employed if any of the following apply:

• You carry on a trade or business as a sole proprietor or an independent contractor.
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself (which includes a part-time business).

Note that you are required to file an income tax return if your net earnings from self-employment were $400 or more.

Schedule C (Form 1040), Profit or Loss From Business

To file your annual return, use Schedule C to report income or loss from a business that you operated or a profession that you practiced as a sole proprietor. If your expenses are $5,000 or less, you may be able to use Schedule C-EZ instead.

Form 1099-MISC, Miscellaneous Income

If someone pays $600 or more for services performed by a nonemployee, they must report it in Box 7 (“Nonemployee compensation”) of Tax Form 1099-MISC. Generally, a payment should be reported as nonemployee compensation if all the following are true:

• The payment was made to someone who is not an employee;
• The payment was made for services in the course of trade or business;
• The payment was made to an individual, partnership, estate, or a corporation; and
• Payments of at least $600 were made to the payee during the year.

If you are an independent contractor, you should receive Form 1099-MISC from the parties that you worked for. Report any income from your Form 1099-MISC on Schedule C.

Schedule SE (Form 1040), Self-Employment Tax

You must file Schedule SE to report your Social Security and Medicare taxes. You can use Schedule SE to calculate the tax due on your net earnings from self-employment. (Use the income/loss calculated on Schedule C to determine the amount of Social Security and Medicare taxes you should have paid during the year.)

For tax year 2014, the maximum amount of self-employment income subject to Social Security tax is $117,000. There is no ceiling on the amount of income subject to the Medicare tax.

RELATED: How Are Social Security Benefits Taxed?

Form 1040-ES, Estimated Tax for Individuals

If you are self-employed, that means you do not have an employer withholding taxes for you. Instead, you must make quarterly tax payments (also known as “estimated tax”) to pay Social Security and Medicare taxes as well as income tax. Use Tax Form 1040ES to calculate and remit these taxes.

RELATED: What Is Estimated Tax and Who Does It Apply To?

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