If you’ve been stressed out about your independent contractor taxes, you’re not alone! As VIPKid Teachers, we are expected to file our own taxes using the 1099 form they mail us at the year end. It can be confusing to know what you’re expected to do in order to pay your taxes as an independent contractor. What papers do I need? What write-offs am I entitled to? Can I do them myself or do I need to pay someone to get my taxes done? I reached out to Pat from Ridester, a site focused on rideshare drivers who, you guessed it, are independent contractors! While they mostly focus on drivers for Uber or Lyft, their tax filing process is nearly the same as us VIPKid teachers. Pat has given me some great steps in order for independent contractors to complete their taxes. Check out his tips for filing taxes as an independent contractor below(For my own personal comments, look for the purple italics addressed to VIPKid Teachers):
We can all agree that tax season can be stressful. Compiling all of your annual earnings, sending money to the IRS, and spending months wondering whether you filed everything correctly is enough to make your head spin.
Tax filings are even more stressful for Independent Contractors.
As an independent contractor, you’re required to file additional forms and set aside money from your earnings, rather than having those earnings withheld from your employer.
Tax filings for freelancers require more paperwork than ordinary employees. However, the extra time can be worth it when you factor in the exclusive tax deductions that you are entitled to.
Let’s take a look at the tax filing process for independent contractors.
Disclaimer: Please keep in mind this information is provided for general informational purposes only to help you understand taxes as an independent contractor. It is not intended to be tax advice for any specific individual as all individuals have different tax situations. Ridester advises obtaining tax advice from a Certified Financial Adviser or a Certified Public Accountant who can address your specific situation.
The Tax Filing Process
- Collect your 1099 Form
- Most companies will take the responsibility of sending you a 1099 in the mail in January or February, whether you work with a service like If working with a service like Postmates or a local business. Your 1099 will show how much money you made over the past year.
- Prepare an Expense List
- Compile all of your expenses to maximize the return you get during the tax filing process. Include any work-related expenses that you took out over the past year to run your freelance business. Some examples of items to include are new laptops, office space rental, costs to maintain your personal website, etc. (VIPKid Teachers – you can write off your internet and even part of your phone bill if you’re using it for work! Also all of your teaching props – whiteboards, puppets, flashcards, etc. See below for more info)
- Fill out the Schedule C and Schedule SE Forms
- Once you have put together your tax deduction list, fill out the Schedule C and Schedule SE forms with all of your expenses.
- Calculate Your Total Profit
- The next step is to use your tax information to calculate your total profit for the past year. To achieve this, take the total amount you made, minus business expenses.
- Fill out the Form 1040
- The last two steps are filling out the regular Form 1040 and paying your applicable taxes online or via mail.
What Tax Documents Do I Need?
Banks will often send out a 1099-K to those who have earned over $20,000 or have collected at least 200 payments via PayPal, credit, or debit card. The IRS started issuing the 1099-K in an attempt to improve tax compliance from independent contractors.
The Form 1099 variant is an essentially a catch-all for contract workers. Citizens may receive a 1099-MISC if they earned royalties or if a business has paid them for services rendered.
For example, any physical cash that you receive from a business who writes off the amount as a tax expense. During such events, Freelancers will typically receive a 1099-MISC from the business. If not, they are required to report the earnings on their own via this form. (VIPKid Teachers – you will probably have this form unless you’ve earned over $20,000 with VIPKid… I personally do not earn that much so I get a 1099-MISC from them)
Schedule C Form
As an independent contractor, one of your responsibilities is to mark all expenses and income you handle under the label ‘self-employed’. Combine the data that you used in the 1099-K and 1099-MISC. Then, use this data to fill out the Schedule C Form.
Once you have completed Form Schedule C, the next step is to tackle the Schedule SE. Independent contractors use this form to calculate how much of their income is taxable.
This amount can be found by subtracting all business expenses from your income. The remaining amount is your net profit. Plug that number into the Schedule SE form to find out how much self-employment tax is due.
The final document taxpayers need to fill out during the tax filing process is the U.S. Individual Income Tax Return, or Form 1040. This document is used to assess all personal clarifications that determine how your income should be processed.
For example, a Form 1040 provides a way for taxpayers to identify spouses and dependents, which may qualify them for additional deductions.
Tax Deductions for Independent Contractors
All tax deductions must be deemed ordinary and necessary.
The best starting point is to search for your specific industry to understand which expenses are seen as ordinary and necessary. For an Uber driver, items such as USB cords might be considered ordinary, while an oil change might be considered necessary. On the other hand, freelancers who work from home may not be able to deduct either of these items.
Conducting business without a smartphone is nearly impossible in today’s day and age. As a result, most of the expenses that you face to maintain your smartphone are tax deductible.
For example, if you bought a cell phone to start your business this year, you can deduct the price of the device when you file.
One important thing to note is that freelancers who use one phone for both business and their personal life will need to estimate which percentage of their usage is personal, and deduct personal usage from the total expense. (VIPKid Teachers – I know I use the mobile app a lot to review for classes, etc. but I also use my phone for personal reasons, so I cannot deduct 100% of my phone bill. At the same time, you’re probably not going to get in trouble for a rough estimate. Who’s to say you don’t use your phone for 50% work and 50% pleasure? Use your best judgement here.)
It may be easier to purchase a separate phone for work purposes. If not, you will be required to log data and cellular usage that was specifically used while working to get an accurate deduction rate.
Healthcare is undoubtedly one of the biggest hurdles that freelancers must overcome. Fortunately, freelancers are able to deduct their healthcare premiums and a portion of other healthcare-related expenses from their annual earnings.
For more, come explore this detailed guide on everything that freelancers need to know about health insurance.
Common Mistakes to Avoid in Taxation
Not Saving Enough
Spending money without paying taxes on it first can leave you owing the IRS a hefty amount come tax season. To avoid this financial nightmare, set aside a portion of your paycheck each week. Save up this money and do not spend it.
The self-employment tax rate is about 15.3%. Additional tax rates added to this, such as local, state, and federal, will vary. To compensate for this, we encourage freelancers to set aside 30% of their income for the sole purpose of paying taxes.
Business vs. Personal
As mentioned previously, deducting expenses that border between business and personal use can be tricky. The IRS will audit you if they suspect that you are trying to deduct personal items instead of business expenses. To avoid this, make sure you avoid filing personal cell phone data usage and mileage recorded for non-business purposes.
Recommend Tax Software for Freelancers
There are many tax filing services online. Each system offers various features and prices that correlate with the service. Although there are a few free ways to file your taxes digitally, only a couple of these options include all of the forms that independent contractors need to fill-out.
TurboTax uses simple language to guide you through the tax filing process.
The software double checks possible deductions you might have missed and directs you to where to find it. Pricing for the Self-Employed Version is rather expensive, however, with a federal charge of $119.99 and a $39.99 fee for state.
Supporting the most tax form coverage and schedules with very few exceptions, H&R Block is another great option for filing taxes. For starters, they offer several options on how to go about the tax filing process as an independent contractor.
This can be very useful for those who prefer personal, non-automated assistance. Plus, H&R Block costs significantly less for those filing as self-employed. Federal is $74.95 and state is an additional $19.95. (VIPKid Teachers – Be wary of H&R Block if you work more than one job… Because I only do VIPKids part time and work another full time job, they wanted to charge me over $300 to file with them! It was absolutely insane, so I chose NOT to utilize their services this year…)
Our last recommendation is TaxAct. Until a few years ago, TaxAct was a free tax filing service that included e-filing service.
TaxAct provides clear, straightforward filing experience at a noteworthy price. Filing your federal tax return as an independent contractor will cost $37. The price for filing your state taxes is $25. (VIPKid Teachers – This is what I used and it actually WAS totally FREE for me! I made less than $66,000 though, so if you make more, you’ll have to pay. If not, I personally recommend TaxAct!)
What if I Don’t File Taxes?
Filing taxes is an important task that everyone is required to participate in. Citizens that do not file their taxes are subject to severe fines.
Initially, an interest rate and late fee are tacked onto the amount owed. These fees are compounded daily and can inflate the final amount owed to staggering numbers within two months.
If these penalties are ignored for any longer, the government can enforce devastating effects.
The process begins with the IRS issuing a Federal Tax Lien. When a citizen receives this warning, the IRS is essentially claiming all of your property, such as a car, boat, or house, as theirs. Further measures will be taken if this red flag is simply tossed aside.
In an effort to settle the amount of taxes you owe, the IRS can seize all of your property. Citizens that do not possess enough property to pay off the amount owed will start to notice a steep cut in their paycheck. If this process of paying off a tax debt is evaded, you can be charged with tax evasion and sent to jail.
Wow, thank you, Pat, for the excellent information for independent contractors! Taxes are certainly a pain, especially for those of us who choose less conventional routes of employment. It sucks to just have one more thing to worry about, but hopefully this guide can make filing your taxes a little easier this tax season and for the years to come! Remember, if you have questions please consult a tax professional. This is meant as a guide, to assist independent contractors, but it is not going to be perfect for every situation and every person. Hopefully it’s helped you! And you can always visit the IRS Website to see their specific requirements for independent contractors as well. I’m also going to provide you with this link to FILE YOUR TAXES FOR FREE if you’re interested. I made less than $66,000 in 2017 so I was able to use TaxAct (as I mentioned above) and it didn’t cost me dime. I highly recommend it! Good luck, teachers!