Independent Contractor - Form 1099 and Tax Liability
If you provide a service to business but are not technically an employee of that business you are an independent contractor, otherwise referred to as ‘1099 employee’ or ‘1099 contractor’. Independent contractors developed these nicknames within industries that rely on their services because it’s necessary to send a 1099 Form to each independent contractor who had earned more than $600 in a taxable year. Outsourcing services to independent contractors helps businesses achieve their operational goals while avoiding the extra burden of taxes for additional man hours.
Since the businesses to which you provided services throughout the year are not responsible for taxation of your earned income, you are. Essentially in the eyes of the IRS, you are a business entity. As such, you are liable for the same taxes and afforded the same deductions as a business owner.
Independent Contractor Tax Liability
You will be required to include your independent contractor or 1099 income on your federal tax return. If you live in a state in which taxes are assessed on a state level, you will also need to include all 1099 income in your state tax return. In addition to state and federal income taxes, you will also be responsible for contributing to Social Security and Medicare. Depending on your income levels and your deductions, the amount of taxes you will be required to pay will vary.
How to Pay Taxes Owed
If your income levels are low enough, you may be able to wait until the end of the year as you would if you were a full time regular employee and just collect your 1099s and W2s (if applicable) to file your tax return by April 15. If you earn enough to have a tax liability of $1K or more, you may be required to pay estimated taxes throughout the year. Estimated taxes are paid quarterly and calculated by taking the entire year’s estimated tax liability and dividing it by four. Payments are due no later than April 15, June 15, September, 15, and January 15 of the year following the taxable period for which you’re paying.
Because your estimated tax liability is just estimation, there is a chance that you may have overpaid and will be entitled to a tax refund. One good practice for independent contractors is to take the portion of all earned income that will be owed in taxes and place it in a savings account, money market account, or another financial account with a high APY (Annual Percentage Yield).
If you are married filing jointly, you may have an easier time meeting your tax liability. If your spouse is a regular employee and pays regular taxes throughout the year, he/she may be entitled to a sizable refund – a refund large enough to cover your tax liability. Different tax arrangements work for different couples, so if you’re married filing separately and would like to review your options on how to get the most out of both of your tax returns, make sure to speak to a qualified tax consultant.
As an independent contractor, you have a wider range of deductions available to you than you did or would as a regular employee. If you work out of your house, you may deduct a portion of your rent and utilities comparable to the ratio of space you use for business as opposed to personal affairs. Other items like travel (vehicle, mileage, business or business related meals, etc), supplies, training materials, and other work related expenses can all be itemized and deducted to reduce your taxable income.
Because everything you spend to earn an income is deductible, it’s important to keep as detailed and accessible records as possible. This will not only help you file an accurate return that could easily be backed up in the event of an IRS audit, it will also help you be better prepared to file your tax return(s) since you spent all year meticulously keeping all your tax related records in order.
Drawbacks of Working as an Independent Contractor
If you want to avoid the possibility of mistakes and have your tax return prepared by a tax expert, compile your 1099s and other documentation and get in touch with Taxes for Expats.
I.J. Zemelman, EA is the founder of Taxes for Expats