Independent Contractor

Lia Kopin-Green
April 13, 2023

What is an Independent Contractor?

An independent contractor is a self-employed individual or business that provides services to another person or organization under a contract as a non-employee. Some common examples of professions that often work as independent contractors include electricians, dentists, lawyers, accountants, artists, and plumbers.

Since independent contractors are not considered employees by law, they do not have taxes withheld from their paychecks. Instead, independent contractors are responsible for paying their own taxes, including self-employment taxes, and must report their income and expenses to the Internal Revenue Service (IRS).

Key Takeaways

  • An independent contractor is a self-employed individual or entity that provides services to another person or organization under a contract.
  • Independent contractors do not have taxes withheld from their paychecks but instead must pay estimated income taxes in advance in the form of quarterly payments.
  • Independent contractors are responsible for arranging their own insurance and retirement.

Paying Taxes as an Independent Contractor

According to United States tax law, independent contractors are considered sole proprietors or single member limited liability companies (LLCs). They are required to report all of their income and expenses on either a Schedule C of Form 1040 or Schedule E form. Moreover, independent contractors need to pay self-employment taxes to the Internal Revenue Service (IRS) every quarter using Form 1040-ES. 

It should be noted, however, that sole proprietors do not necessarily pay taxes on their total gross earnings. Applicable business expenses such as office supplies, equipment and travel expenses can be deducted from their gross earnings to reduce their overall tax liability.

As an example, assume that an independent contractor earns $20,000 in gross income but incurs $5,000 in deductible business expenses. Their net income would be $15,000 and they would be responsible for paying taxes on this amount rather than $20,000.

Pros and Cons of Working as an Independent Contractor

Working as an independent contractor in the United States has both advantages and disadvantages. Some of its main benefits include:

  • Increased flexibility and control over work schedule and workload
  • Potential tax advantages, such as the ability to deduct business expenses which can lower taxable income
  • No limit to annual salary
  • The ability to work from home or remotely
  • Greater control over health insurance and retirement savings plans due to lack of employer-provided benefits.

On the other hand, being an independent contractor has several downsides, such as:

  • Need to manage and pay for their own business expenses, which can be costly
  • Increased responsibility to pay self-employment taxes, which can be more complicated than traditional employment taxes and require additional record-keeping and reporting.
  • Lack of set employer-provided benefits (health insurance and retirement plans)
  • Limited legal protections such as reduced access to unemployment insurance and workers’ compensation compared to traditional employees.

Bottom Line

Whether you are an experienced independent contractor seeking legal guidance or considering transitioning from traditional employment to independent contracting, legal support can be extremely helpful. Attorney At Law provides access to highly skilled tax lawyers who can assist you in navigating even the most complicated tax-related situations.

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