Working as an independent contractor (IC) has become a way of life for many people in the U.S. The Bureau of Labor Statistics’ most recent report suggests that nearly 7% of the workforce is composed of contingency workers. That is an estimated 10.6 million people working as ICs, and the number may very well have increased since then. If you’re part of this population, do you know the full extent of your tax obligations?
To simplify doing your taxes—and the filing deadline was extended to July 15 due to COVID-19, so you have plenty of time—the IRS has released several essential tax tips for independent contractors. Here’s our breakdown of these tips, plus one of our own.
1. ICs must still pay taxes on their earnings
It is a myth that ICs do not have to pay taxes on the wages they earn. Because ICs are paid differently from W-2 employees, they must also pay their taxes in ways that are unlike employees.
This usually means acquiring a 1099 form from any contracting companies you’ve worked with in the past year. This form will provide the information you need to complete and submit your taxes on your own (or with the help of tax software or a certified public accountant).
2. Are you a gig worker? You have to pay up as well
Like other contingent workers, gig workers must pay their taxes, including income taxes, Contribution Act taxes and Medicare taxes. Though terms such as gig worker and independent contractor may have different connotations and nuances, the IRS and Department of Labor place them in the same tax-paying category.
3. Both ICs and the companies they service have tax obligations
Adhering to government tax requirements is a fact of life for both ICs and the companies they provide services for. A company that uses ICs must require them to complete proper government forms (such as W-9s). This enables you to handle your own taxes in a way that is fair and responsible. The company must also maintain accurate and complete records as to how much contractors were paid. So if you need that information, you know whom to ask.
4. All income is taxable regardless of what form it takes
Some companies may think they can pay ICs or temporary workers in cash to avoid having to deal with tax-related paperwork such as verifying taxpayer IDs. This simply isn’t true. Though paying ICs in cash isn’t against the law, not maintaining payment records to show these cash payments may be, even for part-time or side work. Moreover, contractors must still pay taxes on cash payments they receive from these companies, so keep careful track in your own records as well.
5. Reduce your taxes the right way by writing off expenses
Another tax tip for ICs is keeping track of expenses that may be used as tax write-offs. For contractors in transportation, mileage is a common tax expense that can be written off—but only if records and receipts are maintained in an organized manner. In addition to mileage, home care nurses may be able to write off the cost of scrubs, medical equipment, sanitizing supplies and costs associated with maintaining or renewing licensing. Writing off these expenses can lower your overall tax obligation.
6. ICs have two ways to pay what they owe in taxes
Want a valuable tax tip as an independent contractor who also has standard employment? Submit a new W-4 to your employer to have additional taxes withheld. These additional tax withholdings can cover the taxes you are required to pay when you provide services as a contingent worker.
Independent contractors who do not have standard employment can make tax payments on a quarterly basis. Making quarterly payments helps prevent a surprise tax bill from creeping up at the end of the year. To simplify this process, the IRS has set up a no-cost Electronic Federal Tax Payment System (EFTPS) on its website.
7. Get help through Openforce
If you contract through the Openforce platform, you have a member benefits portal. This gives you access to serious discounts on all kinds of products and services, including tax filing, accounting and bookkeeping services through Equinox, a leading provider of business solutions.
Simply sign in through the User Login button at www.oforce.com and click on Perks in the upper right-hand corner to start exploring your member benefits today.