How to Pay Taxes as an Independent Contractor

An individual is an independent contractor if they control how their work is performed for a client. For tax purposes, the IRS considers contractors to be self-employed, regardless of whether they operate as a sole proprietor, LLC member, or through a corporation. Unlike traditional employees, clients do not withhold taxes from a contractor’s pay. This means no federal income tax, Social Security, or Medicare taxes are taken out of payments, and the responsibility for calculating and paying these taxes falls entirely on the contractor.

Key Tax Responsibilities

As an independent contractor, you are responsible for two primary federal taxes. The first is self-employment tax, which is the self-employed individual’s version of the Social Security and Medicare taxes paid by employees and their employers. An employee pays half of these taxes, while their employer pays the other half; self-employed individuals must cover both portions.

For the 2025 tax year, the self-employment tax rate is 15.3%. This rate consists of 12.4% for Social Security on the first $176,100 of net earnings and 2.9% for Medicare on all net earnings. An additional 0.9% Medicare tax may also apply if your earned income exceeds certain thresholds: $200,000 for single filers or $250,000 for married couples filing jointly.

The second tax responsibility is federal income tax. Unlike a W-2 employee, whose employer withholds estimated income tax from each paycheck, an independent contractor receives the gross amount of their earnings directly from clients.

This arrangement places the responsibility on you to set aside a portion of your income to cover your federal income tax and self-employment tax liabilities. Failure to account for and pay these taxes can lead to a significant tax bill and potential penalties when you file your annual return.

Information and Forms for Tax Calculation

To calculate your taxes, you must track all sources of gross income and all deductible business expenses. Income includes payments reported on Form 1099-NEC from clients who paid you $600 or more, plus any other payments received for your work. Deductible expenses are the ordinary costs of running your business, such as home office expenses, office supplies, business-related software, and professional development courses. Vehicle expenses can also be deducted by tracking actual costs or using the standard mileage rate.

Schedule C, Profit or Loss from Business

Schedule C is a mandatory part of your annual tax return that serves as the ledger for your business. You report your total gross income in Part I and list your categorized business expenses in Part II. Subtracting your total expenses from your gross income determines your net profit or loss, which is a foundational figure for your tax calculation.

Schedule SE, Self-Employment Tax

The net profit calculated on Schedule C is the starting point for determining your self-employment tax on Schedule SE. On this form, your net profit is adjusted, as only 92.35% of your net earnings from self-employment is subject to the tax. The 15.3% self-employment tax rate is then applied to this adjusted amount, and the final result is reported on your main tax return, Form 1040.

Form 1040-ES, Estimated Tax for Individuals

The worksheet included with Form 1040-ES helps you estimate your total tax liability for the year. It guides you through a calculation that combines your estimated net profit from Schedule C with any other income you may have. The worksheet helps you figure your estimated income tax, to which you add your calculated self-employment tax from Schedule SE. The result is your total estimated tax, which the form divides into four equal quarterly payments.

Making Quarterly Estimated Tax Payments

If you anticipate owing $1,000 or more in taxes for the year, you are required to pay your estimated taxes in quarterly installments. These payments cover both your self-employment tax and your federal income tax. Making these payments on time is necessary to avoid potential underpayment penalties.

The deadlines for quarterly payments are fixed. The payment for income from January 1 to March 31 is due April 15. The second payment, for income from April 1 to May 31, is due June 16. The third, for income from June 1 to August 31, is due September 15. The final payment, for income from September 1 to December 31, is due January 15 of the following year.

The IRS provides several methods for submitting your estimated tax payments:

• IRS Direct Pay, which allows you to pay directly from a checking or savings account at no cost.
• The Electronic Federal Tax Payment System (EFTPS), a free online service that requires enrollment.
• Mailing a check or money order with a payment voucher from Form 1040-ES.
• Using a debit card, credit card, or digital wallet through an IRS third-party payment processor, which may charge a fee.

Filing Your Annual Tax Return

At the end of the tax year, your financial activities and estimated payments are reconciled on your annual tax return, Form 1040. Schedule C, detailing your business’s profit or loss, and Schedule SE, calculating your self-employment tax, must be attached to your Form 1040. The net profit from Schedule C is reported as business income, and the self-employment tax from Schedule SE is added to your total tax liability.

A part of the annual filing is accounting for the quarterly estimated tax payments you made. You will report the total amount of these payments on your Form 1040, which is then subtracted from your overall tax liability for the year. Keep accurate records of the dates and amounts of each payment you submitted.

This final filing compares the total tax you owe for the year with the total estimated taxes you paid. If your payments were less than your total tax liability, you will owe an additional amount by the tax filing deadline, April 15. If your estimated payments exceed your total tax liability, you are due a refund from the IRS.