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Most independent contractors operate as a sole proprietorship, limited liability company (LLC), partnership or S corporation. — Getty Images/katleho Seisa

If you work for yourself and are not employed with another company, the way you handle taxes is much different from how an employee submits their taxes. As a self-employed independent contractor, you are required to pay federal income taxes, Medicare and Social Security taxes on the money you earn from your customers or clients. To help keep you on top of your finances, here are some tax resources for individual contractors.

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What is an independent contractor?

An independent contractor is someone who works for another person or company, but not as an employee. Because independent contractors are considered self-employed, the income they receive doesn’t have federal income taxes, Social Security or Medicare deducted from it.

Independent contractor tax forms

Since withholdings and deductions aren’t deducted from an independent contractor’s income, you’ll need to use specific tax forms and schedules to complete your tax return, including:

  • Form 1040: Form 1040 is the main form you’ll need to file your taxes. You may also need to fill out one of the numbered schedules listed below if your tax return is more complicated:
    • Schedule 1: Use Schedule 1 if you have additional income — such as unemployment compensation or prize or award money — and deductions to claim, including student loan interest, self-employment tax or educator expenses.
    • Schedule 2: Use Schedule 2 if you owe other taxes, such as self-employment tax, household employment taxes or if you need to make an excess advance premium tax credit repayment.
    • Schedule 3: Use Schedule 3 if you need to claim any credit that you didn’t claim on Form 1040, including foreign tax credit, education credit or general business credit. You would also use this schedule if you have other payments you need to include in your return.
  • Schedule C or Schedule C-EZ: As of tax year 2019, Schedule C-EZ is no longer in use. All taxpayers who would have used Schedule C-EZ will need to use Schedule C from now on to report income or loss from a business you operated or for which you acted as the sole proprietor.
  • Schedule SE: Use Schedule SE to figure out the tax due on your net self-employment earnings. The Social Security Administration uses the information from Schedule SE to calculate your benefits under the Social Security program. Keep in mind that this tax applies to all taxpayers, even if you’re already collecting Social Security or Medicare benefits.

[Read: How to Boost Your Small Business by Becoming a Government Contractor]

As an independent contractor, you’ll need to pay self-employment tax in addition to both state and federal taxes.

How to prepare taxes as an individual contractor

To be able to prepare your taxes as an individual contractor, you need to do the following:

Understand your business structure

Most independent contractors operate as a sole proprietorship, limited liability company (LLC), partnership or S corporation. If your business structure falls into one of these four categories, you’ll need to report your earnings as part of your income.

Know what taxes you have to pay

As an independent contractor, you’ll need to pay self-employment tax in addition to both state and federal taxes.

  • Self-employment tax: Self-employment tax, which consists of your federal Social Security tax (12.4%) and Medicare tax (2.9%), is 15.3% of your net business income. Your self-employment tax covers both the portion of FICA you would normally pay as an employee in addition to the portion employers usually match.
  • Income tax (both state and federal taxes): You’ll need to pay both federal and state income tax in addition to the self-employment tax; your taxable income is your total income for the year minus any deductions.

Calculate and pay estimated quarterly taxes

Once you know what taxes you owe, you will pay them four times each year when you submit your estimated quarterly taxes. The Estimated Tax Worksheet, which is part of Form 1040-ES, can help you calculate the total amount you’ll need to pay for your estimated quarterly taxes.

Take advantage of tax deductions

Throughout the year, keep a meticulous record of all your business expenses so you can minimize how much money you owe the IRS. If a business expense is both ordinary and necessary (meaning it is common, accepted, helpful and appropriate in your trade or business), chances are you can deduct it when you prepare your taxes and save hundreds or even thousands of dollars.

Collect Form 1099-MISC from clients

Each of your clients will need to file a Form 1099-MISC — which states the income you’ll need to report on your tax return — for the work and services you provide them by January 31st. Note: If a client paid you less than $600 during the tax year, you don’t have to file Form 1099-MISC.

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