Becoming An Independent Contractor? 5 Ways Your Taxes Change

Do you want to enjoy more freedom and control over your income by becoming an independent contractor? If so, one of the biggest changes you may experience is in your tax obligations. To help you avoid unwanted surprises, here are five of the biggest ways your taxes will change. 

1. You Pay Self-Employment Tax

While many of the taxes you will be subject to as an independent contractor are familiar, one is unique to self-employment. Known as the self-employment tax, this tax is how you will pay into Social Security and Medicare. However, it's not just a straight replacement for FICA taxes. You will pay both the employer and employee portions, resulting in a tax rate of 15.3%. 

2. You Can Deduct Expenses

One piece of good news for independent contractors is that they can now deduct expenses they couldn't as an employee. Many independent contractors can now deduct things like vehicle usage, licensing, education, supplies, administrative expenses, subcontract labor, and office equipment. Deductions like these reduce the amount subject to both income tax and self-employment tax. 

3. You Get the Pass-Through Deduction

A new benefit for independent contractors is the recent creation of a pass-through tax deduction. Pass-through businesses, in which income tax is passed through to the owner rather than paid by the business, can now deduct up to 20% of their income before figuring taxes. This deduction has several rules for qualification, but you can't access it unless you have non-employment income. 

4. You Need to Pay Quarterlies

Few wage-earning Americans have to deal with estimated quarterly tax payments. But because you no longer have an employer to withhold money from your paycheck and send it to tax agencies, you will have to do this task yourself. Quarterlies, as these estimated payments are called, are paid throughout the year to fulfill your overall tax obligation and avoid fees and penalties. 

5. Your Taxes Are More Complex

Employees whose income is largely or solely from a wage or salary tend to have relatively uncomplicated tax returns. However, an independent contractor's tax filing is nearly always more complex. You'll need to keep more documentation, track more expenses, and plan to avoid unnecessary taxation. This complexity means every independent contractor should work with a tax pro.

Want to know more about how your taxes change if you become an independent contractor? Start by meeting with a business tax preparation service in your state. They will help you understand what to expect so you avoid surprises and keep your tax bill low.