What Tax Form Does an Independent Contractor Use?

Operating as an independent contractor means you are considered self-employed for tax purposes. Unlike an employee who receives a Form W-2, an independent contractor is responsible for tracking income, accounting for business expenses, and paying taxes directly to the government. The payer has the right to control only the final result of the work, not the methods of accomplishing it.

Essential Forms for Getting Paid

Before filing your annual tax return, an information exchange must happen between you and your clients. You will complete Form W-9, Request for Taxpayer Identification Number and Certification, for every client. This form provides them with your name, address, and Taxpayer Identification Number (TIN), which is your Social Security Number (SSN) or an Employer Identification Number (EIN).

From any client who paid you $600 or more during the year, you will receive a Form 1099-NEC, Nonemployee Compensation. This form details the total compensation you received from that payer. You are legally required to report all income you earn, regardless of whether you receive a Form 1099-NEC for it. Even if a client pays you less than the $600 threshold, that income is still taxable and must be included on your tax return.

Reporting Profit or Loss on Schedule C

The primary document for reporting your business’s financial performance is Schedule C, Profit or Loss from Business. This form is filed with your annual Form 1040 individual tax return. On this form, you consolidate all business income and subtract your allowable expenses to determine your net profit or loss for the year.

In Part I of Schedule C, you report the sum of all payments received for your work. This includes the totals from every Form 1099-NEC and any other business income. You must maintain accurate records to ensure all income is reported, as the IRS matches the information from 1099s with the income you report.

In Part II, you deduct the costs of running your business. Deductible expenses must be both ordinary, meaning common in your trade, and necessary, meaning helpful and appropriate for your business. Common categories include office expenses, business-related software, and insurance premiums. Vehicle expenses can be deducted using either the standard mileage rate or by tracking the actual costs of using your car for business, such as gas and insurance.

Calculating Self-Employment Tax with Schedule SE

After determining your net profit on Schedule C, you must calculate your self-employment tax using Schedule SE, Self-Employment Tax. This tax is the independent contractor’s equivalent of the Social Security and Medicare taxes withheld from an employee’s paycheck, often called FICA taxes. It is a contribution toward your coverage under the Social Security and Medicare systems.

To calculate the tax, you first multiply your net profit from Schedule C by 92.35% to find your net earnings from self-employment. The Social Security tax is then applied to these net earnings up to an annual limit, while the Medicare tax is applied to the entire amount.

A benefit related to this tax is the ability to deduct one-half of your total self-employment tax when calculating your adjusted gross income (AGI) on Form 1040. This is an adjustment to income, meaning you do not have to itemize to claim it. This provides a similar advantage to employers, who deduct their share of FICA taxes as a business expense.

Making Estimated Tax Payments Using Form 1040-ES

Because taxes are not withheld from your pay, you are required to pay your income and self-employment taxes throughout the year by making quarterly estimated tax payments. This pay-as-you-go system helps you avoid a large tax bill and potential underpayment penalties when you file your annual return.

The tool for this is Form 1040-ES, Estimated Tax for Individuals. The form’s worksheet helps you estimate your total expected income, deductions, and credits for the year. Based on these figures, you calculate your total projected tax liability and divide it by four to determine each quarterly payment amount.

These quarterly payments have specific due dates:

• First quarter: April 15
• Second quarter: June 15
• Third quarter: September 15
• Fourth quarter: January 15 of the following year

You can submit these payments by mailing a check with a 1040-ES payment voucher, paying online via IRS Direct Pay, or using the Electronic Federal Tax Payment System (EFTPS).