How Does An Independent Contractor Pay Taxes?

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Independent contractors work for themselves and are not employees of the people or companies they work for. When an independent contractor performs a service, they are paid in a lump sum fee that does not have any taxes taken out to pay to the state or federal governments. If an independent contractor does not have taxes taken out of their pay, then how do they pay their taxes? The process is not as difficult as it sounds, but it is something that every independent contractor must be aware of.

Estimated Taxes

Independent contractors pay what are called estimated taxes to the federal and state governments. Each year, the federal government sets four dates that are quarterly deadlines for paying estimated taxes and independent contractors must make tax payments on those dates. Independent contractors can either mail their payments to the government, or they can make their payments online.

Determining How Much To Pay

Prior to the start of the year, an independent contractor should meet with their accountant so their accountant can help determine how much should be paid each quarter. The accountant will create quarterly estimates based on the income the independent contractor made the previous year, or the accountant will use an income projection created by the contractor. The accountant will create payment slips that the independent contractor will use, and these slips will include the address where the payments must be mailed.

Paying Online

Many independent contractors pay their estimated quarterly taxes online using a very easy system the IRS has created. When you go to the IRS website, you will see an option to pay your taxes online. After you choose that option, you will be asked what type of taxes you wish to pay. From the drop down list, you select estimated taxes for the current tax year and then follow the instructions to complete your payment.

Filing Taxes

It is important to remember that the four payments you make throughout the year are only estimates. Prior to April 15th of the following year, you still need to file your income tax forms to see if you paid enough in estimated payments. At that point, an independent contractor would handle their taxes like a person who gets a W-2 each year. If the independent contractor paid too much during the year, then they would get a refund. If they did not pay enough, then they would have a balance to pay to complete their tax filing for that year.

When an independent contractor performs a service, they get paid based on the fee they negotiated with their client. The payment of that fee does not include taking out any tax money for state or federal payments. The independent contractor must make their own estimated tax payments throughout the year and then file a tax form at the end of the year to determine whether they get a refund, or if they have to pay more to settle their tax debt.