The Simple Guide to Independent Contractor Taxes

Updated on January 4, 2024

There is a big difference between being employed and being your own employer. When you are an independent contractor, the taxes you pay are a little different – and can be overwhelming if you don’t know exactly what you are getting yourself into. This article will act as your guide in that matter so that you will know everything there is about independent contractor taxes.

Self-Employed or Employee: Which Applies to You?

Your taxes are greatly depending on whether you are employed or an employee. If you are planning to run a business, you should know exactly what these taxes entail – and how they differ from career to career.

Self-Employed vs. Employee at a Glance

Each career path has its own differences – and before you begin to pay your taxes, you need to understand exactly how they work. Based on several factors, here are the differences between being employed and being self-employed.

Employment TypeBehavioral ControlFinancial ControlRelationship Type
Self-Employed or Independent ContractorYou control all the work that you do for yourself or your company, and you also direct it.You can direct every financial aspect of your business. You make the investments necessary, and taxes are not withheld from your pay.Your services are not key to regular work, and your presence is not always mandatory. You do not have employee benefits.
EmployeeThe company or the business controls all the work that you do. You may also receive extensive training and supervision.The company that you work for has the right to control and direct every financial issue of your job. Taxes are also withheld from your pay.It is expected to be long-lasting or permanent. You have the same rights as every employed person (insurance, paid vacations, pensions, etc.), and the services provided by you are key for regular business.

Based on these aspects, you may decide whether you want to be an employee or a self-employed person.

I am an independent contractor or in business for myself

If you own a business or are an independent contractor, you may say about yourself that you are self-employed. In this case, while you may not be withheld any taxes from our income, you will be required to handle some tax obligations yourself. If this happens, you might want to learn more about paying taxes methodology.

I hire or contract with individuals to provide services to my business

If you are hiring or contracting other people in your business, then you may be going past the self-employed threshold. First, you will have to determine whether the individuals you have hired are your employers or just independent contractors. Depending on what their status is, you might have to pay different taxes.

Determining Whether the Individuals Providing Services are Employees or Independent Contractors

Before you even begin to determine the way in which you treat payments for the services they provide, you will have to know the exact extent of the relationship with their services. You must also find out whether these services are crucial for the regular daily functioning of your company or not.

The person providing your services may be one of the following:

Independent Contractor: Professionals who are in an independent business or trade and are offering their service for the general public to use.

(Common Law) Employee: A person who performs services for someone else – services that can be fully controlled by the employer.

Statutory Employee: Independent contractors working under the common law in order to receive certain tax benefits (e.g. beverage distribution driver, suppliers, insurance sales agent, etc.).

Statutory Non-Employee: These can be direct sellers, certain companion sitters, and licensed real estate agents. They are treated as self-employed people (independent contractors) when it comes to Federal taxes.

Government Worker: Individuals who work as public for the Government and are responsible for paying Federal income taxes.

When deciding the taxpaying method on every individual, you will need to analyze the common law rules – and consider the degree of independence and control.

Common Law Rules

As mentioned, the facts that are providing evidence of independence and control will fall under the following categories:

Behavioral: Is the company the one that holds control over the work done by the person, or is the person in control of the work that they do for the company?

Financial: Is the finance part of the job handled by the person in question, or is a higher-up in control of this aspect?

Type of Relationship: Are there any employee benefits or written contracts? Is the work performed considered a daily key aspect for the business?

Every business must weigh all of these three factors before determining whether someone is an independent contractor or an employee. Some of these factors might suggest that the person is an employee, whereas others will indicate that the person is simply an independent contractor.

Factors may change from person to person – and sometimes, making this decision might not be just black and white. What might be relevant in a certain circumstance might not be completely relevant in the other. In the end, there is no set factor number or “magic” that will make someone an independent contractor or a worker.

In order to make an assessment, the employer needs to look at the entire extent of the relationship, as well as how much right they have to direct and control the services provided. These factors will be used to determine the status of the worker and how the taxes will eventually be paid.

Form SS-8

If it’s still uncertain whether the person you are trying to work with is an independent contractor or an employer – even after you reviewed all the evidence categories – you may fill in the Form SS-8 with the IRS. The analysis may take at least 6 months, but they will determine the status of your worker.

Employment Tax Obligations

Depending on the status of the worker, you will have to fill in the correct forms and then pay the taxes that are associated with them. They can either be the forms and associated taxes for employees, or they may be the forms and associated taxes with independent contractors.

Forms and Associated Taxes for Employees

Every employer is required to report and deposit employment taxes. All of them have certain deadlines, as well as specific forms that you need to file as an employer. By the time the year ends, each employer will have to file the Form W-2 for Wage and Tax Statement, and transmit it through the W-3 form.

The associated employment taxes are the following:

  • Federal Income Tax
  • Social Security and Medicare Taxes
  • Additional Medicare Tax
  • FUTA (Federal Unemployment) Tax
  • Self-Employment Tax

Some of these taxes are withheld from the wage of the employee, whereas others are paid directly by the employer. You might want to become even more familiar with these payroll taxes, depending on the country or the state that you live in. If the taxes are too high, a loan for independent contractors might be due.

Employment Tax Guidelines

There are specific guidelines that have to be followed, depending on the industry or company that you are working at. For example, van operators working in the moving industry will have to follow specific employment tax guidelines, whereas those working in the limousine industry will have their own employment tax procedures to follow.

Misclassification of Employees

Every now and again, an employee may be misclassified. Not only can this turn out to be uncomfortable for the employee, but it may also be inconvenient for the employer. There are certain consequences – but also certain things that you can do.

Consequences of Treating an Employee as an Independent Contractor

If, as an employer, you classify an employee as an independent contractor – without having a legit reason for doing so – then you might be held responsible for paying employment taxes for that person. For more information, you might want to read through the Internal Revenue Code.

Relief Provisions

In some cases, the employer might be relieved from paying the employment taxes for a particular worker – but only if they have a reasonable basis for that. To be offered this relief, you will want to provide all the federal information return during your collaboration with the worker. For relief to be provided, the individual will not have to be treated as an employee.

Misclassified Workers Can File Social Security Tax Form

If a worker believes that they have not been classified properly, and have been deemed an independent contractor, they may use the Form 8919 concerning uncollected Medicare and social security taxes on wages. This way, they should be able to see and report the employer’s share for uncollected taxes.

Voluntary Classification Settlement Program

If an employee had been improperly classified, the taxpayer may go for the Voluntary Classification Settlement Program in order to reclassify their workers. They may receive partial relief from the federal taxes – but the condition is that they have to be eligible for this program.

If the employee gets reclassified but the taxpayer does not qualify, they may have to get loans for taxes in order to solve this problem.

Self-Employment and Taxes

As a self-employed person, you are responsible for paying the self-employment taxes, as well as the income taxes. They are paid in addition to your usual income taxes, and they are comprised of Social Security, as well as Medicare taxes.

Estimated Taxes

If you are a self-employed person that owes $1,000 in taxes every year, then you are expected by the IRS to file quarterly your tax payments. If you fail to make the payments on time, then you will be penalized by the IRS.

How to Pay Estimated Taxes

When you file your return and include the income you get by being self-employed, you will also receive the estimated taxes that you will have to pay the next year. You can find an online tax calculator for that. After that, you’ll have to fill the appropriate form and send it to the United States Treasury.

When To Pay Estimated Taxes

Since you do not have your taxes withheld from your payment by an employer, you will have to pay these taxes four times a year yourself. The payments are spread evenly – generally by January, April, June, and September.

Payment Period

The payment period for the tax year is set quarterly for every self-employed person as follows:

Payment PeriodDue Date
1st of January – 31st of March18th of April
1st of April – 31st of May15th of June
1st of June – 31s of August15th of September
1st of September – 31st of December16th of January (the following year)

If the due date falls on a Saturday, a Sunday, or a legal holiday, you will still be on time if you make the payment on the next business day.

How to Get a Loan for Independent Contractor Taxes

In some cases, you might be in need of a loan to get you through the taxpaying ordeal. In this case, Stilt may prove to be quite helpful, as they also provide independent contractor loans for taxes. The process is fairly simple:

Apply: Fill out a form containing some basic information, like visa status, name, and phone number. This will help Stilt determine your eligibility.

Get Approved: Once Stilt determines your eligibility for a loan, they will make you an offer and tell you the interest rate for the loan.

Start Repayment: Now that you have received the loan, all you have to do is pay the installments within the periods you have decided upon.

As you can see, it’s that easy to get a loan from Stilt!

Final Thoughts

As you can see, dealing with taxes can be particularly troublesome and costly – particularly if you are an independent contractor. Sometimes, the revenue of your company might be enough; but other times, you might just need a loan to get through everything.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.