What Taxes Do Independent Contractors Have To Pay?
The tax codes governing independent contractors differ based on your country of residence. But some common taxes collected from independent contractors include those listed below.
A handful of countries don’t collect income taxes from residents. But for most of the world, income taxes are a reality, even if you’re an independent contractor. The amount you need to set aside for income taxes ranges from as low as 10% in countries like Kazakhstan and Mongolia to as high as 56% in Sweden and Finland.
In the United States, income tax is based on your pay, with higher-income people paying more. You also need to pay income tax to your state. State income tax is based on your pay and can vary. You may also pay income tax to your local municipality.
Social Security or Its Equivalent
In many countries, independent contractors contribute to social security funds for different social programs, including sickness, maternity leave, healthcare, and others. This deduction is a mandatory contribution in countries like Italy and Ireland. You may have to pay an additional tax in Ireland if you earn more than €100,000.
Independent contractors in the United States have to pay a self-employment tax, which covers the amount that would usually be deducted for Social Security, Medicare, and other programs. If you’re an independent contractor working for a U.S.-based company, you may be subject to U.S. tax laws and those of your home country. For this reason, it may be easier to work for an employer of record (EOR).
What taxes can independent contractors deduct?
As an independent contractor, you can write off certain expenses in order to lower your tax liability. Independent contractor tax write-offs mainly include costs you have to absorb that you wouldn’t if you were working in an office.
The self-employment tax can cost you a lot as an independent contractor, so you want to be able to write off part of it. As part of an independent contractor tax deduction, you can reduce your taxable income by 50 percent of your self-employment tax. For example, if you have to pay $1,500 in self-employment tax, you can reduce your taxable income by $750.
As an independent contractor, you may also be eligible for the earned income tax credit if your total earnings put you in a lower or moderate income category.
You don’t have to pay to set up an office, run a website, or market your goods and services when you work for a company. As an independent contractor, you are responsible for these costs. So you may be able to deduct a portion of them from your annual income.
Some tax write-offs for independent contractors include the cost of internet and web hosting, phone bills, and other expenses. If you’re paying for online ads to promote your goods and services, you may be able to deduct the costs.
You may also be able to write off part of the costs for office supplies, utilities, insurance, and home repairs. Keep all your receipts and submit them to a tax professional to help ensure that you get your maximum deduction.
Depending on what you do for work, you may be required to travel for business even if you’re an independent contractor. You can write off travel expenses, but only those related to business. And some expenses, like meals, or only eligible for partial write-offs.
If you’re traveling a lot for work as an independent contractor, it may be helpful to use one credit card specifically for business expenses. This way, you have a record of your business expenses in one place, and you can compare your credit card statement with your receipts when it’s time to file your taxes.
As an independent contractor, you’re likely paying for your health insurance. You can deduct your insurance premiums from your annual taxable income if you're not on a spouse's or another family plan.
If you’re returning to school or taking classes directly related to your job, you may be eligible to deduct the cost from your taxable income. This is not the same as a student loan interest deduction you can take when you’re paying off student loans. Instead, it covers the costs associated with classes, certifications, and other educational activities to further your career.
This deduction doesn’t cover expenses associated with schooling to change careers.
If you’re an independent contractor but you’ve taken out a business loan to start up your own company, you may be able to deduct interest payments on the loan. To qualify, you have to use the loan for business expenses such as office space or advertising.
Retirement Plan Contributions
Most companies offer retirement plans to their employees. When you’re an employee, the company can automatically deduct money from your check and deposit it into a retirement account, The retirement account payment is also deducted from your annual income on your tax statement.
As an independent contractor, you manage your finances, including retirement accounts. But if you’re submitting into a qualified account every year, you can deduct some of your payments from your taxable income.
If you have a retirement plan, its administrator should send you the proper tax documents when it’s time to file taxes, but if not, use your statements to calculate how much you paid.
You may be required to drive as part of your job. Even as an independent contractor, you may have to attend business meetings at client sites or travel for your job. When you use your car as part of your job, you can deduct your mileage and expenses like parking and tolls.
You can only deduct for work-related trips. Pay attention to your odometer to get accurate mileage, or find an app that tracks your mileage.
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Things you need to remember when hiring international contractors
There are plenty of tax write-offs for independent contractors, but you can only write off expenses related to your business. Use a system or database to track your expenses and file your receipts to make filling out the required forms easier come tax time.
If you’re a foreign national working as an independent contractor in the United States, it is worth speaking to a tax professional to find your independent contractor taxes deductions. Keep your receipts to accurately describe how much you’ve spent on different business activities.
Find someone who specializes in foreign tax laws, so you stay compliant with local and U.S. tax laws. When you’re working primarily with one client, working with a company that serves as an employer of record with payroll knowledge may be easier. That way, you can deduct business expenses and taxes automatically while staying in compliance with tax regulations
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Who are independent contractors?
Independent contractors are self-employed persons or entities engaged in providing services for organizations as non-employees.
What are the taxes independent contractors have to pay?
- Income tax (Federal, state and local)
- Social security or its equivalent
What taxes can independent contractors deduct?
- Social security deductions and other self-employment tax deductions
- Operational expenses
- Travel deductions
- Health insurance
- Retirement plan contributions