![]() There’s no limit to what an independent contractor can make in a year. In addition, they can determine their own pricing structure based on billable hours, fixed fees per project, or other metrics. They hold the ultimate decision-making power and can hire or fire as they please. Independent contractors get to choose which clients they want to work with. They can set their hours, work their own way in a field they love, and potentially work anywhere. Independent contractors enjoy a high degree of freedom that employees may lack. Advantages and Disadvantages of Being an Independent Contractorīeing an independent contractor comes with some advantages and disadvantages. You will need to pay an extra 0.9% for any amount exceeding the two thresholds. In addition, there is a 2.9% Medicare tax on total net income up to $200,000 if filing single and $250,000 if filing married jointly. This number will increase to $160,200 in 2023. To determine the amount of taxes due, find the difference between your gross earnings and business expenses.įor the 2022 tax year, independent contractors must pay 12.4% in Social Security contributions on the first $147,000 net income. You can deduct applicable business expenses from your overall tax obligation. Independent contractors don’t have to pay taxes on gross earnings. ![]() In addition, you must submit self-employment taxes every quarter by using Form 1040-ES.5. This requires you to report all income and expenses on Schedule C of Form 1040. You might be classified as a sole proprietor or a single-member limited liability company (LLC). Paying Taxes as an Independent ContractorĪs an independent contractor in the United States, you have specific tax requirements that differ from employees. ![]() When you need a new computer or home office supplies, you will have to purchase those by yourself and can claim them as tax-deductible expenses. You have the flexibility to set your own rates and working hours. Do you write for several different clients, control how you carry out your work and you have a six month long contract with each of your clients? If so, you are considered an independent contractor. These may include:įor example, you are a copywriter who works from home. Independent contractor is a broad term and can include various jobs. If a worker is hired for a definite time frame or a project, they would be considered an independent contractor. For example, an interior designer hired to renovate offices in a bank is not considered a bank employee. Independent contractors also do not usually contribute directly to a company’s core activities. Having a written contract and no benefits isn’t a sufficient reason to be automatically considered an independent contractor. ![]() Is the worker prohibited from working for others at the same time? Is the worker paid a full-time employee salary? Is the worker directly tied to the economic performance of the company?Īnother factor to consider is how the two parties conduct business with each other. If the answer to these questions is yes, then the worker is likely an employee, not an independent contractor. For example, do they give specific instructions on where, when, and how to do the work? Do they provide training? Do they supply the worker with tools and supplies? This refers to how much control an employer has over the worker. ![]() The IRS looks at the following criteria to determine whether a worker is an employee or an independent contractor. What’s the Difference Between an Independent Contractor and an Employee? However, it also comes with risks like irregular pay and fewer benefits. These are the main reasons people choose to forgo the standard employee lifestyle. Many freelance workers value the independence and flexibility their work status provides. Independent contractors are self-employed, so they are responsible for withholding their income taxes and paying their own Social Security and Medicare taxes. For example, they aren’t eligible for employer-funded health insurance or employer-sponsored retirement accounts. Independent contractors do not receive employment benefits that come with a typical employer-employee relationship. Independent contractors are always self-employed and are often referred to as “freelancers.” Artists, freelancers, drivers, designers and more fall under this category.Īn independent contractor is a person that is hired by a business or an individual that has the right to only control the work results but not when and how the work is accomplished. Independent contractors can be in a number of different industries.It’s essential to keep finances and taxes organized as an independent contractor.They make their own schedule and don’t qualify for employee benefits. An independent contractor doesn’t work under an employer. ![]()
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