As an independent contractor, it`s important to understand the various taxes that you are responsible for paying. Unlike traditional employees, independent contractors are considered self-employed and are responsible for paying their own taxes.
Here`s a breakdown of the types of taxes that you`ll need to pay as an independent contractor:
1. Self-employment tax: This tax is also known as the FICA tax, and it`s a combination of the Social Security and Medicare taxes that are paid by employees and employers. As an independent contractor, you`ll be responsible for paying both the employee and employer portion of this tax, which currently amounts to 15.3% of your net earnings.
2. Income tax: As a self-employed individual, you`ll also be responsible for paying federal income tax on your earnings. The amount of income tax that you`ll owe will depend on your total income for the year, as well as any deductions or credits that you`re eligible for.
3. State and local taxes: Depending on where you live and work, you may also be responsible for paying state and/or local income taxes. Be sure to check with your state or local tax authority to determine what taxes you`re responsible for paying.
4. Estimated taxes: Because you won`t have taxes withheld from your paychecks like traditional employees, you`ll need to make estimated tax payments throughout the year. These payments are typically made quarterly, and they`re based on your expected income for the year.
It`s important to note that failing to pay your taxes as an independent contractor can result in penalties and interest charges. To avoid any issues, be sure to keep accurate records of your income and expenses, and make timely estimated tax payments throughout the year.
In summary, as an independent contractor, it`s important to understand the different taxes that you`re responsible for paying. By staying on top of your tax responsibilities throughout the year, you can avoid any surprises come tax time and stay in good standing with the IRS.