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What is an Independent Contractor?
A self-employed individual or business organization not working for another company can be referred to as an independent contractor. Independent contractors have more control over their work compared to employees. They are responsible for setting their working hours, selecting their methods, and utilizing their tools and resources.
Key Characteristics of an Independent Contractor:
- Control over Work: They have the authority to decide how to do the work for which they have been contracted. They are, in most situations, only accountable for delivering specified outcomes.
- Compensation: They typically get paid a fee per project or job and not a salary. Terms of payment may be provided in contracts.
- Tax Obligations Independent contractors: They are responsible for paying their own taxes, including self-employment tax, and do not receive any taxes from the hiring entity. They are often required to file quarterly estimated taxes.
- Advantages: Independent contractors do not usually get benefits such as health insurance, pension schemes, or paid vacations.
- Tools: The workers are responsible for providing their own equipment and tools.
- Liability and Risk: They are responsible for their own business and must insure themselves against liability.
- Relationship between two parties: Usually, the relationship is governed by an agreement that outlines the terms of payment, the duration of the contract, and the scope of the work.
Common Examples of Independent Contractors:
- Freelance designers, writers, and developers
- Consultants
- Independent tradespeople such as electricians or plumbers
- Real estate agents
- Photographers
- Bookkeepers or accountants
Does an Independent Contractor Pay Taxes?
Independent contractors do owe taxes. Self-employment taxes are owed, including federal, state, and Medicare taxes and Social Security and Medicare taxes. These taxes must be reported by the taxpayer, who tends to make quarterly estimated tax payments.
Is an Independent Contractor Self-Employed?
Independent contractors are self-employed. They are an independent entity that works for companies or clients. They handle all their taxes, expenses, and business decisions themselves.
Tax for an Independent Contractor
An independent contractor has to pay various kinds of taxes:
- Self-Employment Tax: This includes Social Security taxes and Medicare taxes. The self-employment tax rate is presently 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare.
- Federal Income Tax: Contractors remit federal income taxes on their net earnings from self-employment minus business expenses. They sometimes make quarterly estimated tax payments.
- State and Local Taxes: Based on where they reside and work, contractors may also have to pay state and local income taxes.
- Sales Tax: If they are selling items or certain services, they may be required to collect and remit sales tax.
Independent contractors will also have the ability to write off business-related expenses, such as transportation fees, stationery, and equipment for offices, to decrease their tax bill.
Also See: Employee Deductions | Employee Empowerment | Employee Evaluation
