What is an independent contractor?

An independent contractor is a self-employed person or business that agrees to work for or provide services to another business without being paid. So, people who work for themselves must pay their Medicare and Social Security taxes.

Also, a business that hires an independent contractor doesn’t have to give them the same perks as its employees, like health insurance and employer-sponsored retirement accounts. The person paying must correctly label each person as an employee or an independent worker. An independent worker is also known as a “freelancer.”

Figuring Out What Kind of Person an Independent Contractor Is

The Internal Revenue Service (IRS) calls doctors, dentists, veterinarians, lawyers, and other workers who work independently “independent contractors.”

But this group also includes contractors, subcontractors, writers, software designers, auctioneers, actors, singers, and a lot of other people who work for themselves and do work for other people. As what’s been called the “gig economy” grows, more and more people work as independent workers.

As an independent worker, you must keep track of your income and include all client payments in your records. Legally, clients have to give 1099-MISC forms to workers if the amount they were paid is enough to cover the cost. A single-payer must give an independent worker a 1099 form showing their annual earnings if they make more than $600 from that payer.

People who work for themselves must choose how much freedom they need and how much risk they are willing to take.

How to File Your Taxes If You Work for Yourself

People who work for themselves as workers in the US are called sole proprietors or single-member limited liability companies (LLCs). On Schedule C of Form 1040 or Schedule E, they must list their income and costs if they make or lose money from rental properties. Also, they must send Form 1040-ES to the IRS with their self-employment taxes, generally every three months.

But because they are sole proprietors, independent contractors don’t always have to pay taxes on their gross wages. Businesses can lower their general tax bill by deducting certain costs. You need to pay taxes on net income, which is the difference between gross income and business costs.

Tax year 2024: On the first $168,600 of net income, independent contractors pay 12.4% in Social Security taxes. On all net income, they pay 2.9% in Medicare taxes. People who file as a single person must pay an extra 0.9% Medicare tax on self-employment income over $200,000 ($250,000 for married couples filing jointly).

Some independent workers may also have to pay state sales taxes to make things. This varies by the type of thing being made.

They can set up other retirement plans, like a SEP IRA, a SIMPLE IRA, or a solo 401(k), but they must pay for them all independently. They also can’t get jobless or workers’ compensation payments.

The pros and cons of working as an independent contractor

The pros

One of the best things about being an independent worker is that it gives people more freedom. They decide what work they will do and what work they will not do. They also set their hours. People who can work from home might be able to save money on clothes and gas that they would have to buy to go to an office.

They might also get a tax break for their home office, which lets them write off the business part of their bills for rent, insurance, fixes, security systems, utilities, and services.

They can also hire and fire employees and choose which clients to work with as they grow their business. They can make as much money as they want, unlike workers who get paid a set amount yearly. Last, they can feel proud and accomplished for building a great business that is theirs alone.

Pros and cons

There are some terrible things about being an independent contractor, like the chance of going bankrupt and missing out on the chance to have a regular job. It’s not like they get a steady paycheck when business is slow, and their income changes a lot from month to month and year to year.

They have a more challenging time getting mortgages, car loans, and other loans from banks and lenders because their income constantly changes. They are responsible for all business costs and aren’t reimbursed for expenses. If they work alone, they don’t have the support and friendship of coworkers.

Since independent workers can’t get health insurance through their jobs, they must pay for their care. Besides that, they must pay Social Security and Medicare taxes for the worker and the boss. They can’t get 401(k) plans through their jobs or matching contributions from the companies that hire them.

Pros

• They can pick their work and set their hours
• Not limited by a single salary, how much money they can make
• I can work from home and save money

Cons

• In charge of all of their work costs
• They need to pay for their healthcare
• Are not eligible for workers’ compensation or jobless insurance

An example of an Independent Contractor

An example of an independent contractor is someone who works for themselves and has a list of clients who pay them to decorate their homes. On top of that, the interior designer might work on a contract for an architecture company that hires them to work closely with clients while a new home is being built.

The designer is a freelancer, so they would work out how many hours, payments, and ideas to share with the architects (with whom they are hired to work) on the project. However, they may spend a lot of time with the client during the decorating process. If the interior designer works for an architecture firm, they only work for their clients. On the other hand, an in-house designer only works for clients of the architecture firm.

How do you start as an independent contractor?

If you work for yourself, you can become an independent worker. In a gig-based economy, many freelancers become independent contractors who work on a contract basis to provide things or services. Independent contractors can have a formal business name registered, get any licenses or certifications they need, and send the IRS an estimated tax payment every three months.

If someone is self-employed, what is the difference between them and an independent contractor?

Being an independent contractor is the same as working for yourself. Some examples of independent contractors are dentists who run their practice. This differs from someone who makes hats and sells them at holiday fairs, which is more like a freelancer because they usually work on a contract basis.

How Do You Fill Out a W9 If You Work for Yourself?

A W-9 form is likely to be asked of you if you are an independent worker hired by a business or person to work for them. You need to check the name, address, and tax ID number. You can find all of the W-9 forms on the IRS website, along with step-by-step instructions on how to fill them out.

How do I fill out a 1099-MISC form for a self-employed person?

Anyone who needs Form 1099-MISC can get it from the IRS website. The form has 18 boxes that you need to fill out. You also need to include the name and address of the payee, their tax ID number, and the name and address of the receiver. The IRS also gives you step-by-step directions on how to fill it out.

How do you pay someone who works for you on their own?

A freelancer is paid the same way anyone else would: by the hour, by the job, or for a set amount of money. You can pay a freelancer in cash, by check, Venmo, or PayPal.

Conclusion

• As an independent contractor, you don’t get employee perks because you’re not an employee.
• They don’t have taxes taken from their salary; they must pay estimated income taxes every three months.
• Freelancers can lower their gross income by covering business expenses. This lowers their tax bills.
• People who work as independent workers have to take care of their retirement and insurance.
• There are a lot of different types of independent workers.