Working as an independent contractor could afford someone with many freedoms. Having the final say on a weekly schedule and no limits on earning potential bring forth potential upsides, but tax issues also arise. Self-employed persons, including independent contractors, must follow tax rules regarding estimated payments. Failure to comply with tax laws could lead to various problems for Texas entrepreneurs.
Estimated taxes and the independent contractor
When a full or part-time employee fills out a W-2 form, the employer uses the information to withhold taxes. The employer must follow the law and send the taxes to the Internal Revenue Service. Independent contractors become responsible for paying their taxes, and the law stipulates they must pay estimated taxes every quarter.
An independent contractor’s tax burden includes self-employment taxes. These taxes cover medicare and social security-related taxes. Taxpayers may take some solace knowing they are putting money towards benefits to collect in retirement.
Issues with estimated taxes
When making estimated tax payments for the upcoming year, a taxpayer could use the Estimated Tax Worksheet provided by the IRS. However, self-employed persons might end up making less than they expected if their earnings drop at some point for any number of reasons. Of course, they could earn more, depending on the situation. Ultimately, anyone who overpays estimated taxes may receive a refund. Those who underpay might get a tax bill.
Tax law statutes spell out the penalties for failing to submit estimated payments. Remaining in compliance with all applicable laws could help a taxpayer avoid problems.
The tax code also provides many legal deductions for business expenses. When the time comes to file a return, an independent contractor may discover legitimate ways to reduce tax liabilities. The “business use of a home” could be one, and there are others.