If someone is self-employed it basically means that he is a willful contractor which is a willful business person. Actually it is just another method of being paid for what you do. Before becoming an independent contractor taxes were different and as an employee the taxes were different.
Ultimately, while the taxation of independent contractors and regular employees are different, the concept of tax filing remains the same. As long as you’re financially savvy and do your due diligence, then you shouldn’t have any trouble filing taxes as an independent contractor. You can even fill out and send your tax return for free with certain tax filing platforms.
In this blog you will come across how to pay yourself, how the taxes should be paid on business income, how to save more money on the taxes that are applicable on business income by subtracting business expenses.
What do you mean by an Independent Contractor?
An independent contractor can be explained as an individual who is an employee-associate for someone but not an employee. When it comes to income tax an independent contractor taxes is observed as a sole proprietor.
The entitlement of “sole proprietor” is used to describe small business. So there is no need of registering the business with state government, both register with IRS and absolutely no need of forming a corporation. The 1099 deductions have a huge significance in the taxation system of the independent contractor.
Being an Independent Contract Affects the pay, but how?
You will surely get paid for the work you do for your own business as the payments are not wages or salary. The payments could be accepted as a business income. There is no doubt that you will be entitled to a salary when doing a business. As the funds received for the products goes straight into the current business accounts wherein an individual is supposed to have a personal bank account.
So in short it is a must to have business and personal accounts both to suit the needs. As business account cannot be used for personal purposes. Taking money out of business account is a withdraw bit a salary as you own the business and are not working as an employee. The amount withdrawn as an owner will not impact ten business taxes in the slightest as the entire tax amount needs to be paid whether a withdrawal is there or not.
As you are not an employee the payment received in the business does not have tiniest federal income tax withholding on them as there is an absence for security, social or Medicare expenses. No doubt there is an escape to paying up of the taxes and paying up the state and federal income tax on income from the business a wilful contractor as the business tax return. The taxes imposed on the social security and Medicare is to be paid as it is a combo of tax known as self-employment tax for independent contractor’s deductions.
How being a sole proprietor work for the taxation?
As and when you are getting ready for the personal income taxes there is a need to be ready for the form also known as Schedule C which permits the business income to be listed from contracting work excluding all the expenses. As majority of the IC’s have the power to file something known as Schedule C-EZ where the total income is merely listed in order to summarize the expenses as it takes only a few minutes for completion of the procedure. This is the tax deductions for independent contractors.
Which expenses could be excluded as Independent contractor?
Typical business expenses that have been paid by you can be excluded with ease. Any expenses that you have incurred you should have excellent records which should be made as and when the expenses were incurred so as to show it as business expense of amount due to an audit.
Anyone would want to include all the expenses one could add. But this to be ensured that the proof of all the expenses made it was solely for business purposes. There are various 1099 independent contractor deductions that needs to be taken care of before legal proceedings.
How distinguish between Which Expenses Are for Business?
The income revenue system (IRS) states that you could only deduct the expenses incurred have a specific business purpose. If you wish to deduct those expenses, these expenses should be very clearly be for business use and not for personal use. Documenting the expenses with amount, date, business purpose and all other details making it a business expense will be for sure a plus point.
Do you need to Pay Quarterly Estimated Tax?
As the business has generated a fair amount of profit margin there will be a need to calculate the payments for the professional taxes. Just in case of existing other source of incomes there are chances to increase the withholding income from a job to acknowledge for the additional self-employment and additional income tax you might need to pay up to the government. As to be more precise the pre-calculated taxes should be able to cover self-employment tax and federal income taxes that you are liable to pay up Medicare and social security purposes.
The first thing need to be observed is to check whether there are chances to increase the amount that is to be paid from the various other source of income. Just in case if you have any outstanding amount to be settled there is a need to pay up the balance taxes on the income as a willful contractor. Also if you have income from the last year it could be used as a basis to measure the estimated tax on bill and work with the help of an expert tax advisor.
How Do I Pay Income Taxes on My Income as an Independent Contractor?
First of all it is important to decide the actual income from all the business activities. The income that is generated from the source of work as Income is enlisted where in all of the exclusions on the salary are considered to get a rough income figure. And that specific figure is put before the line of Form 1040. It gets included along any other income, and later the tax is estimated on the total calculated gross income.
Majority of the states have income taxes and no doubt yes there is a need to pay up the state income taxes which is imposed on the income as a wilful contractor.
How Is Self-Employment Tax Calculated and Included on My Tax Return?
The actual income i.e. profit right from the source of Schedule C to decide the total amount of the self-employment tax amount one needs to pay up to the government. On the other hand the estimation of the self-employment tax is done entirely upon the SE. The outcome of the estimation is an amount of tax which is to be included in the total income tax you owe to the government
There are numerous instances where an independent contractor may come across situation where he may be confused with the taxations and various forms that need an eye for close observation. There might be situation be completely opposite as there is a need to run a check on tax for professional purpose with the help of tax readying application or programs to help in easing to ready the taxes. All the important factors with respect to the taxation even the 1099 tax deductions are included as well.