How to pay taxes as a 1099 contractor? Are you working as a contractor for the past few years? Have you reported income received in the prior year on your tax return? All business owners, whether they are freelancers or employers, need to have a basic understanding of paying taxes.
Getting confused? Don’t worry! We will let you know how to pay taxes when you work as a 1099 contractor. We also provide information about who is a 1099 contractor, the responsibilities of a 1099 worker, and when you need to pay freelance taxes. Moreover, you can also know about self-employment taxes, and estimate the quarterly taxes.
Who is a 1099 contractor?
1099 contractors are the ones who work on a course of business or trade for an employer or an organization and receive income throughout the year. The income received is not considered a regular income. Contractors receive income that is outside of the regular salary, wages, etc. Freelancers, web designers, cab drivers, etc., are considered as 1099 contractors. Independent contractors receive 1099 Tax Form at the year-end for performing work throughout the tax year.
What is a self-employment tax?
Tax filed by self-employed individuals to the IRS for earning income apart from regular salary from a single employer considered as “Self-employment tax”. For example, if you earn $400 or more in a tax year as a freelancer from any single employer, then the IRS considers you as “Self-employed”. The IRS requires you to file taxes as a business owner.
Self-employment tax includes both Social Security and Medicare taxes. So, whether the individual is a solopreneur or entrepreneur, they are required to pay self-employment tax. Moreover, if you are working for a corporation, Medicare and Social Security taxes are deducted from the paycheck. But for entrepreneurs, are responsible to pay Medicare taxes and Social Security taxes on their own.
What is the significant responsibility of a 1099 worker?
Working as a freelancer or a 1099 contractor offers a lot of freedom. Along with it, it provides significant responsibilities. They are discussed below:
- When you earn $400 from a single employer for working as a contractor, you are required to include this on your annual tax return.
- By hiring a tax accountant helps an individual to save hundreds of dollars.
- Understanding tax deductions is the key to save money and avoid tax audits.
- The tax time isn’t once a year for freelancers or independent contractors. It is always on the horizon.
- Self-employed individuals are responsible to pay their taxes own by figuring out what they owe and when to pay.
When do you need to pay freelance taxes?
As we know, the income paid to contractors is not withheld by the employers. So, freelancers who owe $1,000 or more in taxes required to pay estimated taxes quarterly. IRS Form 1040-ES helps the individuals to know how much amount is owed in taxes each quarter. For example, if you make an underpayment when paying quarterly taxes, then the remaining balance is paid when you file an annual tax return by April 15. Moreover, you may have to pay an additional fee if you underpay quarterly taxes. Furthermore, independent contractors are required to pay state income tax as well as local taxes.
What type of structure is your business?
Firstly, as a 1099 contractor, you are responsible to identify the structure of your business. This includes LLC, S-corporation, C-corporation, sole-proprietorship, etc. In general, the legal structure of the business not only affects the personal assets but also determines how much you owe as taxes. According to the IRS, freelancers file taxes as sole proprietors by filing Schedule C Form. As a result, freelancers who form a corporation or an LLC will pay employment tax, federal and state taxes, and self-employment taxes. As we know, the business owner who pays the contractor will report the income using 1099 Tax Form to the IRS. The IRS uses this information return form to check whether the contractors are including 1099 income on the tax return form.
How to estimate quarterly taxes?
1099 contractors who owe at least $1000 as taxes are expected to pay estimated taxes quarterly. To estimate quarterly taxes, the individual is responsible to refer prior year’s tax returns. For instance, if you are working as a freelancer this tax year, then you cannot estimate tax payments accurately. The individual can correct the mistakes that occur in underpaying or overpaying estimated taxes when filing annual tax returns. The IRS will issue a correction either by asking to pay missing taxes or by issuing a tax return for any excess amount you paid. As per the IRS rules, independent contractors must pay 90% of taxes or the equivalent of 100% of last year’s tax bill by December.
Form 1099 online is an IRS-authorized e-file provider which helps to report the income paid to the contractors with the respective 1099 Tax Form. We provide step-by-step guidance to file tax returns easily, quickly, and securely to the IRS.