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If you are not aware of it already, you are considered an independent contractor. The general rule used to determine if an individual is an independent contractor is if the payer has the right to control or direct only the result of the work done by an independent contractor, and not what will be done and how it will be done.

Filing your yearly income taxes as an independent contractor means you will have to fill out additional forms and be subject to a special type of tax called "self-employment tax" (more on this below), and if it is your first time, the experience can be confusing. The good news is that being an independent contractor means that you are considered self-employed, and as such, you are entitled to deductions on your home office and business equipment that may save you money – if you know what to do. This short and by no means comprehensive tutorial is intended to help guide you through the additional forms that you will need to complete and provide you with a basic understanding of the terms that you may run across. At the end of this tutorial, you will find examples of completed forms, and .pdf files of the forms mentioned in the tutorial, as well as useful publications from the IRS website.

What Is Self-Employment (SE) Tax?
Self-employment (SE) tax is a social security and Medicare tax that applies primarily to individuals who work for themselves. As an independent contractor, you will be required to pay SE tax. Social security and Medicare taxes for most wage earners are calculated by their employers and automatically deducted from their paychecks, but because you are considered an independent contractor, these taxes are not automatically deducted, and it is your responsibility to calculate this amount yourself. You are required to pay SE tax if your net earnings from self-employment amount to $400 or more. You can figure out your SE tax yourself using Schedule SE (Form 1040).

You may not be required to pay self-employment tax if you are employed elsewhere as an employee while operating as an independent contractor. In such a case, part or all of any tax refund from a personal-income filing related to your wage income will be redirected to cover any SE taxes you may owe.
To pay SE tax, you must have a social security number (SSN), or if you are a nonresident or resident alien and you are not eligible to receive a SSN, you will need an individual taxpayer identification number (ITIN). To apply for either a SSN or an ITIN, contact the following to receive the proper form:

SSN: 1-800-772-1213 (Form SS-5)
ITIN: 1-800-829-3676 (Form W-7)

You can also download the forms from the IRS website at www.irs.gov.

Paying Estimated Tax
Estimated tax is the method used to pay tax on income that is not subject to withholding (this includes SE tax). If you expect to owe less than $1,000 in total taxes, you can pay them at the same time you file your income taxes. If you expect to owe $1,000 or more in total taxes, you will need to make estimated tax payments. Use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay this tax. These payments are made quarterly, and you will need to calculate these taxes at the beginning of the year.

You can avoid paying estimated taxes if you are employed elsewhere as an employee while operating as an independent contractor by having your employer increase the income tax taken out of your pay. To increase your withholdings, use Form W-4, Employee’s Withholding Allowance Certificate. Next...

 

 
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