Understanding Independent Contractor Taxes: A Guide for Employers

Who is an Independent Contractor?

Independent contractors contribute significantly to the U.S. economy every year. In 2021, the U.S. had 23.9 million independent contractors. This number has increased significantly in the last five years (12.9 million in 2017). It is projected that more than 86.5 million people will work as independent contractors in the U.S. by 2028, which is more than half of the country’s population. While organizations are hiring more independent contractors daily, the one thing that constantly remains complicated is the taxes. 

One question that always pops us is, do independent contractors pay taxes? The answer is yes. Depending on their income, independent contractors do pay taxes. Independent contractor taxes, also known as 1099 contractor taxes, can be paid by the employer or the contractors themselves. While many contractors choose to pay taxes on their own, many are either unaware or don’t pay taxes at all. The latter forces employers to take up the responsibility of going through the paperwork and filing taxes for their contractors.

Why you are responsible for independent contractor taxes

If your independent contractors do not file taxes at their end, you must clear the paperwork and deduct the taxes from their payments. Now, there are standardized steps and rules for this, which we will discuss further, but an employer must do this for the following reasons:

• To avoid employee misclassification: As a business owner, you are bound to hire both full-time employees and independent contractors. The payroll for your full-time workers takes care of their taxes and social security deductions. However, you need to specify separately the same for covering taxes for independent contractors. If not done accurately, this can lead to employee misclassification. Misclassification has grave consequences and will lead to a lot of time, money, and energy spent at courts and federal agencies.
• Error-free bookkeeping: Consider that an independent contractor worked with your organization for a few months and didn’t pay the required taxes. It will lead to a lot of ambiguity in your books for those months. This is because you will have provided the contractor with the right amounts for basic pay, insurance, etc. However, the same money was not documented. As a result, you will be taxed for the amount that should have been deducted from the contractor’s paycheck.
• No hassles with the IRS: No organization wants trouble with the IRS. Issues like employee misclassification and undocumented transactions are closely scrutinized, and even minor discrepancies in your records can result in a notice landing on your desk.

It’s not just about paying your independent contractor taxes; it’s about knowing why it matters. Now that you understand the “why,” let’s move on to the “how.

Paying taxes as an independent contractor

As an independent contractor, you’re considered self-employed by the IRS. This means you are responsible for managing and paying your own taxes, unlike traditional employees whose taxes are withheld by their employers.

Understand your tax obligations
Independent contractors need to pay both income tax and self-employment tax, which covers Social Security and Medicare. The self-employment tax rate ranges from 15.3% to 12.4% for Social Security and 2.9% for Medicare.

Track your income and expenses
Maintain accurate records of all income received from clients and any business-related expenses. These records are essential for calculating your taxable income and claiming deductions.

Make quarterly estimated payments
Because taxes aren’t automatically withheld, you are required to make estimated tax payments each quarter using Form 1040-ES. Payments are generally due in April, June, September, and January.

File your annual tax return
At the end of the tax year, file Form 1040 along with:

• Schedule C to report your business income and expenses
• Schedule SE to calculate your self-employment tax

You’ll also account for any estimated tax payments you’ve made during the year.

Receive and use Form 1099-NEC
If you earn $600 or more from a client during the year, they must send you Form 1099-NEC, which reports how much they paid you. Even if a client doesn’t send this form, you’re still required to report the income.

Deadline for reporting independent contractor taxes

As an independent contractor, you’re responsible for paying your own taxes on a quarterly basis. These estimated tax payments are typically due on the following dates each year:

• April 15 for income earned between January 1 and March 31
• June 15 for income earned between April 1 and May 31
• September 15 for income earned between June 1 and August 31
• January 15 (of the following year) for income earned between September 1 and December 31

If a due date falls on a weekend or federal holiday, the deadline is moved to the next business day. Missing these deadlines can result in penalties and interest from the IRS.

In addition to quarterly payments, you must also file your annual tax return by April 15 using Form 1040, along with Schedule C (to report your business income and expenses) and Schedule SE (to calculate self-employment tax).

If a client pays you $600 or more in a year, they are required to send you Form 1099-NEC by January 31 of the following tax year. You will use this form to accurately report your earnings when filing your return.

Paying taxes as an independent contractor requires diligence, but by staying organized and meeting these deadlines, you can stay compliant and avoid unnecessary penalties.

Tips for paying independent contractor taxes

Running an independent contractor payroll is nowhere similar to paying your full-time employees. Here are some tips that you can follow to make paying taxes easier:

Make sure you have the right details on Form W-9

This is the single most important thing that you can do to make paying independent contractor taxes as easy as possible. Once you have the right TIN, you do not need to worry about deducting taxes on your own.

Classify your employees

You must ensure that there is a clear, documented distinction between your full-time employees and your contractors. This will help you avoid a lot of struggle with the IRS and other federal and state agencies. If you are confused around  independent contractors vs employees, you must fill out Form SS-8 to understand and classify your workers on paper.

Make timely and well-documented payments

Making timely payments to your independent contractors is important as it will help you determine the exact amount of money you spent on paying contractors in a given year. This will be very helpful when you go out and fill out Form 1099-NEC. Moreover, it will also help you maintain a healthy professional relationship with your contractors.

Document backup withholdings

This will be of immense help in cases where you need to make independent contractor tax deductions yourself. To make this easier, you can highlight all independent contractors who have not submitted a valid TIN. This will help you make the right deductions and document them simultaneously when you pay them.

Yes, paying independent contractor taxes is a time-consuming and confusing task; however, it can be avoided if you partner with an independent contractor/freelancer payment platform. 

Simplify independent contractor taxes with Multiplier!

Paying contractor taxes is a challenge, but paying contractors, in general, is also a challenge, especially if you are dealing with multiple contractors across states and countries. 

Multiplier’s freelancer payments platform helps you onboard, pay, and manage freelancers and contractors across the globe in a few simple clicks. 

Our user-friendly dashboard provides you with all the crucial information like the number of hours worked, leaves taken, remuneration, location, etc., as and when you need it. 

With entities in over 150 countries, Multiplier can help you access talent across the globe, generate customized and compliant employment contracts, and onboard contractors quickly. With Multiplier, you can choose customized payment cycles, pay in any currency, and stay compliant with all local labor and tax laws. 

Multiplier also gives you the opportunity to attract more talent by providing benefits like bonuses and insurance for independent contractors.

Want to know more? Book a free demo now!