Independent contractor taxes

Independent contractor taxes refer to the federal, state, and sometimes local taxes that self-employed individuals—like freelancers, gig workers, and consultants—are responsible for paying.

Homebase Team

Min Read

What are independent contractor taxes?

Independent contractor taxes refer to the federal, state, and sometimes local taxes that self-employed individuals—like freelancers, gig workers, and consultants—are responsible for paying. Unlike traditional employees, independent contractors don’t have taxes withheld from their payments. Instead, they must calculate, file, and pay taxes on their own, often on a quarterly basis.

For small business owners who work with independent contractors, it’s essential to understand how contractor taxes work—both to stay compliant and to support a smooth payment process. Homebase helps employers streamline contractor payments and generate 1099 forms to simplify year-end tax reporting.

What taxes do independent contractors have to pay?

Contractors are typically responsible for:

Self-employment tax – This covers Social Security and Medicare and is 15.3% of net earnings (12.4% for Social Security + 2.9% for Medicare).
Federal income tax – Based on income and deductions, paid via estimated quarterly payments.
State income tax – Varies depending on the contractor’s state of residence.
Local taxes – In some cities and counties, additional taxes may apply.

Independent contractors don’t receive W-2s or have taxes automatically withheld, so they must keep track of their income and file Form 1040 with a Schedule C (to report income and expenses) and Schedule SE (to calculate self-employment tax).

How do contractors make tax payments?

Contractors usually pay taxes by submitting estimated quarterly payments to the IRS and their state’s tax agency. These payments are due:

April 15
June 15
September 15
January 15 (of the following year)

Failing to make timely estimated payments can lead to penalties and interest, so independent contractors need to plan ahead.

How do businesses report payments to contractors?

If your business pays an independent contractor $600 or more in a calendar year, you’re required to issue a Form 1099-NEC to the contractor and the IRS. To do this, you must:

Collect a completed W-9 form from the contractor at the start of the working relationship.
Track total payments made during the year.
File Form 1099-NEC by January 31 of the following year.

This ensures that the IRS can match contractor income with the appropriate tax filings.

Are independent contractors responsible for their own tax deductions?

Yes. One of the benefits of being an independent contractor is the ability to deduct business-related expenses. These might include:

Equipment or tools
Software or subscriptions
Travel expenses
Marketing or advertising
Home office costs

These deductions reduce the contractor’s taxable income and overall tax liability, but it’s up to the contractor to maintain accurate records and receipts.

How do independent contractor taxes affect small businesses?

While small businesses don’t withhold or pay payroll taxes for independent contractors, they still have responsibilities, including:

Correctly classifying workers (contractor vs. employee)
Collecting and filing W-9s and 1099s
Avoiding worker misclassification, which can result in fines

Using a payroll platform like Homebase Payroll helps you manage payments and stay compliant, especially during tax season.

Try Homebase Payroll to simplify contractor payments and tax reporting.

What happens if you misclassify an independent contractor?

Misclassifying a worker as an independent contractor when they should be an employee can lead to:

Back taxes and penalties
Fines from the IRS or state agencies
Lawsuits or wage claims

Review the IRS’s 20-factor test or use Form SS-8 to determine the correct classification to avoid penalties. When in doubt, consult a legal or tax advisor.

How Homebase supports contractor payments and compliance

Paying contractors and managing their tax forms doesn’t have to be a hassle. With Homebase Payroll, you can:

Track and pay independent contractors on time
Automatically generate and file 1099-NEC forms
Maintain W-9 records for every contractor
Keep organized records for audits and tax prep

Sign up for Homebase to take the guesswork out of managing contractors and taxes.

‍

FAQs

No items found.