Do Independent Contractors Charge Sales Tax?

An independent contractor is a self-employed individual or entity providing goods or services on a contractual basis. Contractors are responsible for their own tax obligations, including income tax and self-employment taxes for Social Security and Medicare. The requirement to collect and remit sales tax depends on additional factors.

The main considerations are the nature of what is being sold and the geographic locations of the sales. State and local governments impose sales tax, and the rules vary significantly across jurisdictions. Understanding these obligations is a part of managing business finances for any contractor.

Determining Your Sales Tax Obligation

The primary factor in determining a sales tax obligation is the distinction between tangible personal property (TPP) and services. States levy sales tax on the retail sale of TPP. This includes items like handmade jewelry, custom furniture, or printed photographs. If a contractor’s business involves selling these types of goods, they will likely need to charge sales tax.

Conversely, many services have been exempt from sales tax. Contractors providing services like freelance writing, digital graphic design, or business consulting often do not have to charge sales tax on their labor, as the deliverable is expertise or a digital file rather than a physical item.

This distinction becomes more complex as many states have expanded their tax base to include specific categories of services. Common examples of services that are now taxable in various states include landscaping, janitorial work, and vehicle repair. A contractor offering these types of services would need to treat them as taxable transactions.

The rules for digital products are inconsistent across the country. When a graphic designer emails a logo file, some states may classify this as a non-taxable digital service, while others may define it as a taxable digital good. Contractors dealing in digital deliverables must check the regulations in the states where their customers are located.

For mixed transactions that include both taxable and non-taxable elements, the invoice must clearly separate the charges. For instance, an interior designer might charge a fee for their design service (potentially non-taxable) and also sell furniture (taxable TPP). Sales tax should only be calculated on the value of the tangible goods sold.

Understanding Sales Tax Nexus

An independent contractor is only required to collect sales tax in states where they have “nexus.” Nexus is a legal term for a connection between a business and a state that is significant enough to justify the imposition of that state’s tax laws. If a contractor has nexus in a state, they must register for a sales tax permit and follow that state’s rules.

The most direct form of nexus is physical presence. A contractor establishes physical presence by having a location like an office or store within a state. Storing inventory in a warehouse or having employees or other contractors working on your behalf within a state can also establish physical presence. Even temporary presence, like attending a trade show to make sales, can trigger this obligation in some jurisdictions.

Following the 2018 Supreme Court decision in South Dakota v. Wayfair, states can require out-of-state sellers to collect sales tax based on economic nexus, even without a physical presence. This is based on the volume or value of sales into that state.

Economic nexus is established when a contractor’s sales into a state exceed a specific threshold within a set period. Many states use a sales threshold of $100,000, and the alternative of 200 separate transactions has been eliminated in a growing number of jurisdictions. Contractors must track their sales on a state-by-state basis to determine where they have an economic nexus and a resulting sales tax obligation.

Information Needed for Sales Tax Registration

To register for a sales tax permit with a state’s Department of Revenue, an independent contractor must gather specific information to streamline the application. Key details include:

• A federal tax identification number, which can be a Social Security Number (SSN) for sole proprietors or a Federal Employer Identification Number (EIN).
• The legal business name and any “Doing Business As” (DBA) or trade name.
• Details about the business structure, such as sole proprietorship, partnership, LLC, or corporation.
• The business’s physical and mailing addresses.
• The North American Industry Classification System (NAICS) code that best describes the business activity.
• Projections of future sales, which help the state determine a filing frequency.
• Personal information for the owner or corporate officers, including names, addresses, and SSNs.

The Sales Tax Registration Process

Most states require or encourage online registration through their Department of Revenue’s web portal. This method is the fastest way to submit an application and often provides instant confirmation. For those who cannot use an online system, most states still offer the option to submit a paper application by mail, though this method is slower. Some states may charge a small registration fee, while in many others it is free.

After the application is processed, the state will issue a sales tax permit, also known as a seller’s permit. This document provides the business with a unique registration number that authorizes it to collect sales tax. Along with the permit, the state will provide information regarding the assigned filing frequency. This schedule, which could be monthly, quarterly, or annually, is based on the estimated sales volume and dictates when the contractor must file sales tax returns.

Collecting and Remitting Sales Tax

After receiving a sales tax permit, the contractor is required to collect and remit sales tax. This involves charging the correct tax rate on all taxable sales. The rate is a combination of the state tax and any applicable local taxes levied by cities or counties. State Department of Revenue websites provide tools and tables to find the precise rate for a specific address.

When invoicing a client, the sales tax must be calculated and shown as a distinct line item. The sales tax collected is not the contractor’s money; it is held in trust for the state. Many business owners find it helpful to keep collected sales tax funds in a separate bank account to avoid using them for business operations.

The final step is to remit the collected taxes to the state by filing a sales tax return according to the assigned frequency. Most states require electronic filing and payment through their online tax portals. Even if a contractor has no sales and collected no tax during a filing period, they are still required to file a “zero return” to remain in compliance.