As an individual contractor, it is vital to understand your tax responsibilities and obligations. As a self-employed individual, you are responsible for ensuring that your taxes are filed accurately and on time.
Individual contractor tax is the tax that self-employed individuals must pay on their earnings. It is essential to note that as a self-employed individual, you are not an employee of any company. Hence, you must pay self-employment tax (SE tax) as well as income tax.
SE tax is a Social Security and Medicare tax paid by self-employed individuals. It is calculated at a rate of 15.3% on the first $142,800 of your net earnings for 2021. Your net earnings include all income earned from your business less any allowable deductions. If your net earnings exceed $142,800, you only pay the Social Security portion of the SE tax on the excess. The Medicare tax rate is 2.9% on all your net earnings.
In addition to SE tax, you must also pay federal income tax on your net earnings. The federal income tax rate for self-employed individuals depends on your income level. You can find your federal income tax bracket using the IRS tax tables.
To ensure that you meet your tax obligations, you must keep accurate records of all your business income and expenses. This includes maintaining receipts, invoices, and bank statements. It is also important to track all your business-related expenses, including office supplies, travel expenses, and any other business-related expenses.
As an individual contractor, you are responsible for paying your taxes throughout the year. You can do this by making estimated tax payments to the IRS every quarter. The estimated tax payments are based on the amount of tax you expect to owe for the year.
In conclusion, understanding individual contractor tax is crucial for self-employed individuals. You must fulfill your tax obligations by paying SE tax and income tax. To ensure compliance with IRS requirements, keep accurate records, and make timely estimated tax payments. Seek advice from a tax professional if you have any questions or concerns about your tax obligations as an individual contractor.