Being your own boss gives you great flexibility and freedom to do what you love. You work hard, you value every dollar you earn and you have the skills to create your own success. However, with this career choice comes the responsibility of strictly managing your finances, like taxes. We’ve provided important tax topics below to make this process less of a burden so you can enjoy doing what you love.

Independent Contractor vs. Employee

Independent contractors and employees are very different, and it’s important to understand why. Some examples of independent contractors are lawyers, accountants, electricians, graphic artists and freelance writers. If you’re an independent contractor, you are considered self-employed, and your tax situation will be very different than an employee. Use the chart below to understand the differences.

                            

Independent Contractor Employee
                    
  • Works for multiple clients or companies
  • Paid when a job or service is completed
  • No taxes withheld from pay
  • Sets own working hours
  • Not eligible for any company benefits
  • Provides own tools and decides how tasks are completed
  • May hire someone to complete a job
  •      
           
  • Works exclusively for a company
  • Paid on a regular basis
  • Taxes deducted from pay
  • Company sets working hours
  • Offered benefits such as insurance, 401(K), paid vacation etc.
  • Company provides tools and controls duties
  • Worker must perform services
  •      

 

Tax Requirements

Let’s start with some important tax forms, instructions, and publications that you’ll want to use and reference at tax time.

    

Forms, Instructions & Publications Purpose
1040: U.S. Individual Income Tax Return To prepare your tax return
Schedule C (Form 1040): Profit or Loss From Business To report how much income you made or lost and to report deductible expenses
Schedule C-EZ (Form 1040): Net Profit From Business Simpler version of Schedule C (must meet certain requirements to use)
Schedule SE (Form 1040): Self-Employment Tax To calculate the self-employment tax you owe
Publication 505 To reference for tax withholding and estimated tax
Publication 535 Explains what you can and can’t deduct
Publication 583 Provides info on starting a business and keeping records

 

Do I Have to File?

If your net earnings from self-employment were $400 or more, you’ll need to file an income tax return. If your net earnings were less than $400 and self-employment was your only form of income, you usually are not required to file a return. However, if you meet any other filing requirement listed in the instructions for Form 1040, you’ll need to file a return.

 

Self-Employment Tax

As an independent contractor, you’ll likely have to pay self-employment tax as well as income tax. Self-employment tax is Social Security and Medicare taxes that aren’t withheld from your pay as an employee’s would be.

Your self-employment tax is calculated on Schedule SE. You’ll calculate your net profit on Schedule C to see how much of your income is subject to self-employment tax.

 

Quarterly Estimated Tax Payments

Since you do not have an employer withholding taxes from your pay, you are responsible for paying them yourself. Estimated tax payments are used to pay income tax and self-employment tax and paying them quarterly will take the sting out of your year-end tax bill.

Generally, you can use the $1,000 rule to see if you need to pay quarterly taxes:

  • If you expect to owe $1,000 or more, you’ll most likely have to pay quarterly taxes.
  • If you expect to owe less than $1,000, you may not have to make quarterly payments, but you’ll have to pay year-end taxes.


If you don’t pay enough tax to cover your tax liability, you can be charged a penalty from the IRS. If you pay too much in quarterly payments, you’ll get a refund. You only owe taxes on your business profit, which can be calculated using the chart below. If you have a net loss, you’re not liable for the tax.

You’ll use Form 1040-ES to calculate your estimated tax payments. The form is more of an instructional guide to figure the amount you owe, so you don’t need to send it to the IRS. Just hang on to it for your records. The form also includes four payment vouchers if you’d like to send a check or money order, or you can pay online here.

 

Tax Deductions

As a self-employed individual, you deserve all of the write-offs you can take in your tax situation. You take on a lot of expenses, so don’t overlook deductions that can help you get your hard-earned money back.

 

Home Office Deduction

If you work from home, you could be entitled to a home office deduction. To be eligible, you must meet the criteria set by the IRS. Use the chart below to see if you can deduct your home office.

 

 

Taxes for the self-employed can be complicated. If you need assistance, contact your professional tax preparer. Be sure to follow us on Facebook and Twitter for important tax tips all year long.