Independent contractors pay Social Security and Medicare taxes as self-employment taxes. If you meet income thresholds, these taxes apply to any earnings you receive for self-employment, such as for tutoring or baby-sitting. To pay, you must file special paperwork with your annual federal income tax forms. In many cases you'll also have to make estimated payments during the year.
Self-Employment Tax Rates
The self-employment tax rate for independent contractors is 15.3 percent as of the 2014 tax year. This breaks down to 12.4 percent for Social Security for the first $113,700 of income and 2.9 percent for Medicare with no income limit. These rates include both the employer and the employee portion of these taxes.
Minimum Income Levels
You owe self-employment taxes as an independent contractor only if you have a net profit of more than $400 from self-employment income. In general, compute your net profit by subtracting your business expenses from your self-employment income. Even if you earn less than $400 from self-employment, you still may have to file income taxes -- for example, if your total income including other jobs exceeds a certain minimum. This income threshold varies with your age and filing status.
Filing Estimated Taxes
In place of withholding taxes, independent contractors typically pay estimated Social Security, Medicare and income taxes four times a year. Using Form 1040-ES, Estimated Tax for Individuals, compute whether you need to file quarterly and how much you owe. If you're required to file, your payments must be postmarked no later than April 15, June 15 and Sept. 15 of the tax year to avoid penalties. You must make an additional estimated payment by Jan. 15 of the following year unless you file your annual return by Feb. 1.
Avoiding Quarterly Payments
If you're an independent contractor who also works as an employee, you may be able to avoid filing quarterly taxes. As long as your employer withholds an amount large enough to cover self-employment and income taxes on your side income, quarterly filing isn't required. You can also fill out a new W-2 form to increase the amount your employer withholds.
Filing Annual Taxes
When you file your annual taxes, compute your profit as an independent contractor on Schedule C or C-EZ, and transfer this amount to Form 1040. Also calculate your self-employment taxes on Schedule SE, and transfer the total to line 57 of Form 1040. Calculate one-half the self-employment tax on Schedule SE, and claim this amount as a deduction on line 27 of Form 1040. If you owe taxes, the amount appears on line 78 of your 1040.
If you fall short in paying self-employment and income tax, the Internal Revenue Service can charge you a penalty. For example, you may receive a penalty if you underestimate quarterly payments or don't have enough withheld from employment to cover taxes on side income. Even if you pay in full by the end of the year, you can receive a penalty if you're behind on one of the quarterly due dates.
- Internal Revenue Service: Self-Employment Tax
- Internal Revenue Service: Estimated Tax for 2014
- Internal Revenue Service: 2014 Filing Requirements
- Internal Revenue Service: Reporting Miscellaneous Income
- Internal Revenue Service: Self-Employed Individuals Tax Center
- Internal Revenue Service: Form 1040
- Internal Revenue Service: Form 1040-ES
- Internal Revenue Service: Schedule SE Self-Employment Tax
- Internal Revenue Service: Schedule C
- Internal Revenue Service: Schedule C-EZ