Independent Contractor Tax Rates in California

An independent contractor is a self-employed individual who provides services to a business and controls the means and methods of their work. This autonomy comes with the responsibility of managing your own tax obligations. Because taxes are not withheld from your payments, you are accountable for paying them directly to the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB).

Confirming Your Independent Contractor Status in California

You must be correctly classified as an independent contractor under California law. The state presumes a worker is an employee unless the hiring entity can satisfy the “ABC test.” All three conditions of the test must be met for a worker to be classified as an independent contractor.

The first condition is that the worker is free from the control and direction of the hiring entity regarding the performance of the work. This applies both under the contract and in practice. It examines whether the hiring entity dictates details like the schedule and methods used, or if the worker retains autonomy over these aspects of the job.

The second condition is that the worker performs work that is outside the usual course of the hiring entity’s business. For example, if a retail store hires a plumber to fix a leak, that service is outside the store’s core business of selling clothes.

The final condition is that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. This means the contractor has an existing, independent business that would continue after the job is completed. Evidence can include having a business license, other clients, and marketing their services.

Federal Tax Obligations for Independent Contractors

Independent contractors are responsible for two primary types of federal taxes, which are reported on your annual Form 1040 tax return. The first is the self-employment tax, which covers Social Security and Medicare taxes. While these taxes are split between an employee and employer, independent contractors are responsible for paying both portions.

The self-employment tax rate is 15.3%. This rate is composed of 12.4% for Social Security on the first $176,100 of net earnings and 2.9% for Medicare with no income limit. An additional 0.9% Medicare tax may apply to earnings over certain thresholds, such as $200,000 for single filers or $250,000 for those married filing jointly.

The second federal tax is the regular income tax, which applies to your net earnings after business deductions. The net profit from your business is combined with any other income on your personal return. Your income tax liability is then calculated using progressive federal income tax brackets, where the tax rate increases as your income rises.

California State Tax Obligations for Independent Contractors

Independent contractors in California must also pay state income tax on their net earnings from self-employment. This amount is reported on California Form 540. California uses a progressive tax structure with rates ranging from 1% to 12.3%, which are adjusted annually for inflation. An additional 1% mental health services tax applies to individuals with income over $1 million.

California also has a State Disability Insurance (SDI) program. While mandatory for employees, participation is optional for independent contractors through a program called Disability Insurance Elective Coverage (DIEC). If you enroll, you pay premiums based on your net profits. This elective coverage allows you to receive benefits if you are unable to work due to a non-work-related illness, injury, or pregnancy, or if you need to take time off to care for a seriously ill family member or bond with a new child.

Calculating Your Net Earnings to Determine Taxable Income

Your tax liability is based on your net earnings, not your gross revenue. To determine this figure, you subtract ordinary and necessary business expenses from your total income, a calculation performed on IRS Schedule C. Common deductible expenses for independent contractors include:

• Home office costs. You can calculate this using either the simplified method, which is a standard rate per square foot, or the actual expense method, which involves prorating a portion of your home expenses like mortgage interest, insurance, and utilities.
• Vehicle expenses. If you use your car for business, you can deduct costs using the standard mileage rate of 70 cents per mile or by tracking the actual costs of using your vehicle, including gas and maintenance, and deducting the business-use percentage.
• Business-related supplies, software subscriptions, and professional services such as legal or accounting fees.
• Premiums paid for health, dental, and long-term care insurance for yourself, your spouse, and dependents.
• One-half of the self-employment taxes you pay. This deduction is taken from your gross income and reduces your overall taxable income.

How to Pay Federal and State Estimated Taxes

Since taxes are not withheld from your income, you must pay them throughout the year using a “pay-as-you-go” system. This is done by making quarterly estimated tax payments to both the IRS for federal taxes and the FTB for state taxes. These payments should cover your self-employment tax and your income tax liability for the income earned in that quarter.

The deadlines for these quarterly payments are April 15 for income earned January 1 to March 31; June 15 for income from April 1 to May 31; and September 15 for income from June 1 to August 31. The final payment is due on January 15 of the following year for income earned from September 1 to December 31.

For federal estimated taxes, you can use the worksheet with Form 1040-ES to calculate the amount. Payments can be made by mailing a check with a payment voucher or electronically through IRS online payment systems.

For California state estimated taxes, you will use Form 540-ES to determine your payment amount. Payments can be mailed with a voucher or made online through the FTB’s website. While the due dates are the same, California has a specific payment schedule requiring 30% of the estimated tax by the first quarter deadline, 40% by the second, 0% by the third, and the remaining 30% by the fourth quarter deadline.