Independent contractors and employees are treated very differently when it comes to tax prep. Independent contractors are their own small businesses, even if they don’t have an incorporated or otherwise legally recognized business or brand. Let’s discuss what it takes to file taxes as an independent contractor.
First, You Need a W-9
The beginning of the tax-filing process for independent contractors always starts with a W-9. Before you even start working on a contracting project, you need to be sure you’ve sent a W-9 with your name, address, and TIN (taxpayer identification number) to the company that is hiring you.
It’s important to know who you are partnering with. W-9s must be sent to each company that wants to pay you for your contracting work, and they contain important and sensitive information about your business.
Contractors Need Contracts
No matter who you work with, whether it’s the President, a reputable local company, or your childhood best friend, it’s always best practice to get things in writing.
Not only does a contract outline the expectations of the project for both parties, but it is also a great way to legally document the income you are expecting to make (be it hourly wages, cost of materials, or labor and equipment expenses).
Nothing messes up your tax preparation and expectations more than a missing or incorrect payment. Contracts and legal agreements can be as itemized or as broad as you like, but you always want to make sure you protect yourself and your business.
If you get paid by the company that hires you (which should happen 100% of the time, but it doesn’t always work that way), you will need to report that income. And if you don’t get paid by the company that hires you – whether it be for legal or illegal reasons – you’ll want to make sure you document the time and materials that you should have been compensated for on your taxes.
Form 1040 or 1040SR
Working as an independent contractor has tons of perks, but one of the negative aspects is that you are responsible for federal payments to Social Security and Medicare – you don’t have a Payroll Department that deducts it from your checks automatically.
To determine and report these taxes, you’ll use the schedule SE on Form 1040 or 1040-SR.
And last but not least, once the paperwork has been filed, the work has been completed, and the invoices have been paid, you know what comes next: you have to gather your documents and report your earnings. To do that, you need to make sure the company that hired you sends you a completed Form 1099-NEC (non-employee compensation).
The 1099-NEC is used by companies that hire independent contractors. The hiring business will fill out and send this form in, and they should also send you a copy.