Are you an Employee or an Independent Contractor?

An independent contractor is a person or entity employed to perform work for—or provide services to another entity as a non-employee. As a result, independent contractors must pay their own Social Security and Medicare taxes. The payer must correctly classify each payee as either an independent contractor or employee. Another term for an independent contractor is a freelancer.

Doctors, dentists, realtors, lawyers, and many other professionals who provide independent services are classified as independent contractors by the Internal Revenue Service (IRS). However, the category also includes contractors, subcontractors, freelance writers, software designers, auctioneers, actors, musicians and many others who provide independent services to the general public. Independent contractors have become increasingly prevalent in the rise of what has been dubbed “the gig economy.”

For tax purposes independent contractors are considered sole proprietors or single member limited liability companies (LLCs). They must report all their income and expenses on Schedule C of Form 1040 or Schedule E if they have profits or losses from rental properties. Further, they must submit self-employment taxes to the IRS, usually on a quarterly basis using Form 1040- ES.

However, as sole proprietors, independent contractors do not necessarily pay taxes on their gross earnings. Applicable business expenses can reduce their overall tax obligation. The difference between gross earnings and business expenses is the net income, the amount on which taxes are due. Independent contractors must keep track of their earnings and include every payment received from clients.

User | 6/02/2020