What Tax Forms Do Contractors Fill Out?

Independent contractors operate businesses that provide services to clients without being considered employees. Unlike traditional employees who have taxes withheld from each paycheck, contractors are responsible for managing their own tax obligations throughout the year. This requires a clear understanding of specific Internal Revenue Service (IRS) forms and tax concepts to ensure compliance and avoid potential penalties.

Starting as a Contractor: Form W-9

When beginning work with a new client, independent contractors typically encounter IRS Form W-9, “Request for Taxpayer Identification Number and Certification.” This form allows clients to report payments to the IRS, for issuing Form 1099-NEC, Nonemployee Compensation, if payments exceed $600.

Contractors must accurately complete the W-9 by providing their legal name, business name (if applicable), and current address. A Taxpayer Identification Number (TIN) is also required, typically a Social Security Number (SSN) for individuals or an Employer Identification Number (EIN) for businesses. The W-9 includes a certification that the TIN is correct and that the contractor is not subject to backup withholding. Backup withholding occurs if the IRS has previously notified the contractor of underreported income, requiring the payer to withhold a percentage of future payments for tax purposes.

Reporting Your Business Income and Deductions: Schedule C

Most independent contractors operate as sole proprietors, using IRS Schedule C, “Profit or Loss From Business (Sole Proprietorship),” for their annual tax filing. This form is used to report all business income and to claim eligible business expenses, ultimately determining the net profit or loss from the contracting activity. The net figure from Schedule C then carries over to the individual’s Form 1040.

Gross income for a contractor includes all payments received for services rendered. While clients may issue Form 1099-NECs to report payments, contractors must report all income, regardless of whether a 1099-NEC was received. This includes cash payments, direct deposits, or any other compensation for services.

Contractors can reduce their taxable income by deducting ordinary and necessary business expenses. Common deductible expenses include vehicle expenses, where contractors can choose between deducting actual costs (gas, repairs, insurance) or using the standard mileage rate, which was 67 cents per mile for 2024. Office expenses like supplies, postage, and professional services such as legal or accounting fees are also deductible. Business insurance premiums and certain health insurance premiums for self-employed individuals can also be deducted.

The home office deduction is available for many contractors, provided specific criteria are met. The space must be used exclusively and regularly for business, and it must be the principal place of business or a place where clients are met. Contractors can calculate this deduction using either the simplified method, which allows a deduction of $5 per square foot up to 300 square feet (a maximum of $1,500), or the actual expense method, which prorates actual home expenses like mortgage interest, rent, utilities, and depreciation based on the percentage of the home used for business. Other common deductions include advertising and marketing costs, business-related travel and a portion of meal expenses, utilities and telephone costs attributable to business use, and software or subscriptions used for business operations. Depreciation for business assets, such as equipment or furniture, allows contractors to recover the cost of these items over their useful life.

Calculating and Paying Your Taxes: Self-Employment Tax and Estimated Payments

Independent contractors are responsible for self-employment (SE) tax, which covers their Social Security and Medicare contributions. This is distinct from income tax and is equivalent to the FICA taxes withheld from an employee’s paycheck, but contractors pay both the employer and employee portions. The self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies to net earnings up to an annual wage base limit, which was $168,600 for 2024, while the Medicare portion has no income limit.

Self-employment tax is calculated on 92.35% of the net earnings from self-employment, which is typically the net profit reported on Schedule C. One-half of the self-employment tax paid is deductible from gross income on Form 1040, reducing overall income tax liability.

Since taxes are not withheld from their income, independent contractors must make estimated tax payments throughout the year to cover their income tax and self-employment tax liabilities. The IRS requires estimated payments if a contractor expects to owe at least $1,000 in tax for the year. These payments are typically made quarterly, with due dates on April 15, June 15, September 15, and January 15 of the following year.

Contractors estimate their annual income and deductions to project their total tax liability for the year. The IRS provides several methods for making these payments, including online options like IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS). Payments can also be mailed with Form 1040-ES payment vouchers. Failure to pay enough estimated tax throughout the year or paying late can result in penalties for underpayment. A penalty can generally be avoided if the tax owed is less than $1,000, or if payments cover at least 90% of the current year’s tax liability or 100% of the prior year’s tax.

Organizing Your Financials: Essential Record-Keeping

Accurate record-keeping is essential for independent contractors, supporting precise tax reporting, maximizing deductions, and preparing for potential audits. Organized financial records provide a clear picture of business performance and support all claims made on tax returns. This approach helps in substantiating income and expenses to the IRS.

Income records include invoices issued to clients, payment confirmations, and all Forms 1099-NEC received. Expense records should consist of receipts for all business purchases, bank statements, and credit card statements. For vehicle use, detailed mileage logs are necessary if claiming the standard mileage rate. Documentation for home office expenses, such as utility bills and records of the office’s square footage, should also be kept.

Some contractors prefer physical filing systems for paper documents, while others opt for digital solutions like scanning receipts and storing them in cloud-based systems. Accounting software designed for small businesses or self-employed individuals, such as QuickBooks Self-Employed or FreshBooks, can streamline the process by categorizing transactions and generating reports. Even simple spreadsheets can be effective for tracking income and expenses if meticulously maintained.

Regarding retention, the general guideline is to keep tax records for at least three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. For instance, if a significant amount of income (more than 25% of gross income) was not reported, the IRS has six years to assess additional tax, making a six-year retention period advisable for all relevant records. Records related to business assets, such as purchase and sale documents, should be kept until the statute of limitations expires for the tax year in which the asset is disposed of.