As the pandemic forces more individuals to turn to remote work, understanding the nitty-gritty of working as an independent contractor is an art in itself. In this article, we've put together the most important information, which you might find useful to get started as an independent contractor in the US.
More than one-third of the U.S. workforce is currently contracting in some capacity.
Working as a independent contractor in the US
You are an independent contractor if you are self-employed and providing services to clients. The law considers you a small business owner, instead of an employee.
In that regard, the laws that govern employees’ terms of employment do not apply to you, and clients have no obligation to pay you employee benefits.
The local and state laws in California, and New York City differ from the rest of the US and have placed certain conditions for employers who hire independent contractors.
Independent contractor in New York
If you are an independent contractor in New York, your business is under the Freelance Isn’t Free Act, which came into force on May 15, 2017. The Act states that all contracts valued at $800 and above are in writing.
This means that it requires clients to pay the full amount on the date specified on the contract. Alternatively, they must make payments within 30 days after service delivery, if the contract does not specify a date.
Employers risk exposure to liabilities such as fines for late payment, attorneys’ fees, and statutory damages. Overall, the act aims to protect independent contractors from exploitation, and ensure that contractors pay taxes on time.
Independent contractor in California
Since 2019, the new law Assembly Bill (AB) 5 was enacted which addresses workers' employment status when they claim to be independent contractors and not employees. To qualify as an independent contractor you must go through a three-part test to determine your eligibility to be an independent contractor.
However, the AB5 law exempts those who hire independent contractor who are doctors, architects, lawyers, insurance agents, real estate agents, grant writers, tutors, manicurists, and truck drivers.
The three tests fall under
- The Labor Code
- The Unemployment Insurance Code
- The Industrial Welfare Commission (IWC) wage orders
The ABC test
To distinguish yourself from an employee to an independent contractor you must fulfill the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, not under the contract for the performance of the work and in fact;
- The workers performs work that is outside the usual course of the hiring entity's business and;
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the involvement in the work performed
Make sure to be acquainted on all of these before registering your business.
Taxes in the US as an Independent Contractor
As an independent contractor, the IRS expects you to pay your taxes as businesses do. You will have to pay self-employment tax, as well as make some deductions on your taxes, where applicable.
Report all your income
You need to report all your income to the IRS, even if you think you do not have any tax obligation for that source. As an independent contractor, you may have different sources of income, which can be from local clients or from overseas as well as interests, dividends, etc.
Therefore, it is easy to lose track of your earnings, if you selectively report them. As an independent contractor, instead of getting the W-2 form for reporting your taxes, you will get multiple 1099-MISC from your clients (not applicable for overseas clients).
Tax identification number
Moreover, the IRS requires that everybody who is working in the US to pay their taxes, even if they are illegal immigrants. To do that, you need to apply for and get your IRS tax identification number.
The IRS will not ask about your immigration status but will want to know your physical address and contacts. They use them to contact you in case there is an issue with your taxes.
Filing Taxes on independent contractor Income in the USA
Paying your taxes will ensure you work freely, legally, and grow your income successfully. It will also help you to keep an eye on your income and charge better rates.
According to the IRS, once you receive your 1099-MISC, as an independent contractor, you will need to fill three forms. The type of form to fill will depend on when you plan to pay your taxes, and whether your earnings are $400 or more.
1. Schedule C (Form 1040 or 1040-SR)
You use the Schedule C (Form 1040 or 1040-SR) form to report your income as an independent contractor.
2. Schedule SE (Form 1040 or 1040-SR)
You also need to file Schedule SE (Form 1040 or 1040-SR), if your earnings are $400 or more. The form also helps you to determine how much social security and Medicare tax you need to pay on your income.
You need to file an estimated tax income using Form 1040-ES if your income is not subject to withholding. This includes freelancing, dividends, rents, alimony, interest, etc.
Once you have not made timely estimated tax payments, then you also need to fill Form 2210. The form helps you to see if you have unpaid taxes and penalties, and the total amount you owe the IRS.
When paying your taxes, you can deduct any necessary expenses that you incur while being self-employed. However, these expenses must be essential to your work. These include:
- Business-related food
- Office expenses
- License fees
- Education/certification expenses
Items that you would own or pay for even without being an independent contractor do not qualify as deductibles. For instance, you can deduct the cost of using your home office, if you only use the space/room for your work.
However, if space also doubles up as a family study room, then you cannot write it off as an expense. You also cannot deduct your internet bill, if you also use it for home entertainment as well.
Other non-deductibles include education expenses in fields, which are not in your profession or line of work.
When to Pay Your Independent Contractor Taxes
Independent contractors and small businesses are required to pay their taxes 4-5 times annually. This requirement applies to an independent contractor in the US, who is a sole proprietor, or a sole owner of a limited liability company (LLC).
As an independent contractor in the US, you must file and pay your taxes by mid-April. You then have to make quarterly payments by mid-June, mid-September, and mid-January. You do not need to fill any forms when making quarterly payments.
If as an independent contractor you have registered a corporation or LLC with multiple owners, you have to file your taxes twice. You have to file for yourself as an individual, and then for your corporation/LLC, separately.
Independent contractors will need to have the following:
- Bank Account
- Tax Identification Number (TIN) or Social Security Number
Most US clients/businesses prefer to work with independent contractors who have a US bank account, TIN/SSN, and physical address. That makes their tax-filing easier, and they do not have to justify why they hired you to their local or federal authorities.
The exception is when they work with you on outsourcing platforms. The platforms have the required framework to allow them to facilitate work transactions between contractors and US clients.
Over to you!
As more companies and clients turn their attention toward California's rich talent pool for contract opportunities, it’s important for independent contractors to up their game, have a professional outlook and consider each of the above factors to conduct their work professionally.
RemotePass makes it easy to hire, onboard & pay your global team in full compliance, giving you everything you need to support them in one platform. We have a team of experts that work to ensure that our clients and contractors are in compliance for over 100+ countries.