As an independent contractor, it is important to understand how much you will be taxed on your income. Unlike employees who have taxes withheld from their paychecks, independent contractors are responsible for reporting and paying their own taxes.
One of the first things to understand is that as an independent contractor, you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes. The current rate for Social Security tax is 12.4% on earnings up to $142,800, with half paid by the employer (you, the independent contractor) and half by the employee (also you). The rate for Medicare tax is 2.9%, with half paid by the employer and half by the employee.
In addition to Social Security and Medicare taxes, independent contractors must also pay federal income tax on their earnings. The amount of federal income tax you owe will depend on your income level, deductions, and exemptions. It is important to keep accurate records of your income and expenses throughout the year in order to properly calculate and report your tax liability.
State income tax may also apply, depending on the state in which you live and work. Some states do not have an income tax, while others have rates ranging from less than 1% to over 10%.
It is important to note that independent contractors are not eligible for many of the same deductions and benefits as employees. For example, independent contractors cannot deduct commuting expenses or employer-provided health insurance premiums. However, they may be able to deduct business-related expenses such as office supplies, equipment, and travel expenses.
In order to properly calculate and pay your taxes as an independent contractor, it is recommended that you seek the advice of a tax professional or use tax software specifically designed for self-employed individuals. Failure to properly report and pay taxes can result in penalties and interest charges.
In conclusion, as an independent contractor, you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes, federal income tax, and potentially state income tax. It is important to keep accurate records and seek the advice of a tax professional in order to properly calculate and report your tax liability.
