An independent contractor is considered a self employed individual, and income earned by an independent contractor is considered self-employment income. "Self-employment income is income that arises from the performance of personal services, but which cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee" (Self-Employment Tax).
Self-Employment Tax
Independent contractors are responsible for paying both income tax and self-employment tax. Income tax is paid on the income earned from performing the independent contractor services. Self-employment tax is social security and Medicare taxes. The self-employment tax rate for 2006 is 15.3% which is broken down into two parts: 12.4% for Social Security and 2.9% for Medicare. Self-employment tax is only applied to "the first $94,200 of...combined wages, tips, and net earnings in 2006" (Self-Employment Tax).
Self-employed individuals who do not have taxes withheld must make estimated tax payments, which are due quarterly. Estimated tax is determined by figuring "expected adjusted gross income, taxable income, taxes, deductions, and credits for the year" (Estimated Taxes).
Forms used to Report Income
Corporations, individuals, partnerships, estates, and trusts must use Form 1099-MISC to report income to the independent contractor and the IRS. Amounts of $600 or more paid to independent contractors during the year must be reported (A Guide to Information Returns).
Independent contractors report self-employment income on Form 1040, Schedule C, Profit or Loss from Business or on Form 1040, Schedule C-EZ, Net Profit from Business. Social Security and Medicare taxes are reported on Form 1040, Schedule SE, Self Employment Tax.
Expenses that can be Deducted from Income
Some expenses that can be deducted from income include:
- Half of self-employment tax may be deducted in figuring AGI - only affects income tax (Self-Employment Tax).
- Business use of a personal home
- Business use of a personal car
- Business supplies
Independent Contractor versus Employee: Which is Better?
Self-Employment Tax
Independent contractors are responsible for paying both income tax and self-employment tax. Income tax is paid on the income earned from performing the independent contractor services. Self-employment tax is social security and Medicare taxes. The self-employment tax rate for 2006 is 15.3% which is broken down into two parts: 12.4% for Social Security and 2.9% for Medicare. Self-employment tax is only applied to "the first $94,200 of...combined wages, tips, and net earnings in 2006" (Self-Employment Tax).
Self-employed individuals who do not have taxes withheld must make estimated tax payments, which are due quarterly. Estimated tax is determined by figuring "expected adjusted gross income, taxable income, taxes, deductions, and credits for the year" (Estimated Taxes).
Forms used to Report Income
Corporations, individuals, partnerships, estates, and trusts must use Form 1099-MISC to report income to the independent contractor and the IRS. Amounts of $600 or more paid to independent contractors during the year must be reported (A Guide to Information Returns).
Independent contractors report self-employment income on Form 1040, Schedule C, Profit or Loss from Business or on Form 1040, Schedule C-EZ, Net Profit from Business. Social Security and Medicare taxes are reported on Form 1040, Schedule SE, Self Employment Tax.
Expenses that can be Deducted from Income
Some expenses that can be deducted from income include:
- Half of self-employment tax may be deducted in figuring AGI - only affects income tax (Self-Employment Tax).
- Business use of a personal home
- Business use of a personal car
- Business supplies
Independent Contractor versus Employee: Which is Better?
Comments
Another excellent business article.
Your business articles are really helping me out, thanks so much.
Another good one. I may space them out over the next two editions.
Good information.
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