Independent Contractor Tax Rate

Venturing out on your own as an independent contractor can add flexibility to your work life. You decide how to operate your business and when you want to work.

However, tax time can be more difficult as an independent contractor. You encounter different types and rates of taxes than a W2 employee. Even how you report and pay taxes differs. If you are not careful, you may be surprised by an additional bill or could be hit with costly penalties and interest if you don't understand the independent contractor tax rate.  

Understanding Self-Employment Taxes: What Makes Them Different?

Self-employment taxes are a combination of Social Security and Medicare taxes. The self-employment tax rate is 15.3%, which is the sum of 12.4% for Social Security and 2.9% Medicare.

Both parties split the Social Security and Medicare taxes in an employer-employee relationship. The employee pays 7.65% and the employer pays 7.65%.

The rules for paying self-employment taxes are different when you are an independent contractor. Without an employer to share the tax burden, the independent contractor is responsible for paying the entire 15.3% of self-employment tax. However, you can deduct 50% of your self-employment tax on your return.

You calculate what you owe in self-employment taxes using the net profit of your business when you are an independent contractor. The good news is the IRS lets you lower your income with expenses that qualify as tax deductions. The lower the net profit, the less self-employment tax you pay.

Federal Taxes and Income Tax Rates by State

While federal taxes remain the same regardless of where you live, the same isn’t true for state taxes. States set their own tax rates and rules. As an independent contractor, you could owe more or fewer taxes depending on where you live.

States with no state income tax include:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming
• New Hampshire (no taxes on earned income, tax on dividends and interest)

States that impose a flat-rate income tax:

States that impose a graduated income tax:  

If you live in a state that imposes a graduated income tax, calculate your total taxable income when filing taxes and locate your state’s tax bracket. State tax brackets all vary so remember to leave yourself plenty of time to research how much you’ll owe before Tax Day arrives.

Independent Contractor Tax Rates

As an independent contractor, you report your business activity on Schedule C of your personal tax return. Use Schedule C to enter your business's income earned for the year. As a contractor, you may have tax deductions you can take to reduce what you have earned for the year.

Common tax deductions you can take when self-employed include:

Software Subscriptions

Your software subscription fees may be tax-deductible if used for your business. If you pay a subscription fee to use accounting, cloud-based storage or design software, you may be able to deduct these expenses from your tax return.

Education and Research Materials

If you purchased books, professional publications or research material, you may be able to deduct what you paid if it directly relates to your business. Similarly, the cost of attending a class or webinar to expand your skills in your current profession may be tax-deductible.

Keep in mind that education costs you pay which are not directly related to your profession cannot be deducted.

Travel Expenses

Your travel expenses may be tax deductible if incurred for your business. If you use your personal car or truck to visit customers or make deliveries, you can deduct your costs in one of two ways:

• Standard mileage: Multiply the IRS standard mileage rate of $0.655 by the total business miles you have driven for the year. Under the standard mileage rate, you cannot deduct other vehicle-related costs like repairs or gasoline.
•  Actual expenses: You can deduct the business portion of actual vehicle expenses paid for the year. Vehicle expenses may include gasoline, insurance, repairs and oil changes.

Out-of-town travel expenses, such as hotels and airfare, may be deductible if incurred as part of your business. However, you cannot deduct personal travel costs. If you bring your spouse along, you cannot write off their airfare or other related travel costs.

Office Supplies

You can deduct the cost of office supplies used for business purposes. Paper, pens and toner could be fully deductible if you use them for business. 

Who is Required to Pay Self-Employment Tax?

You must pay self-employment tax if you earn $400 or more in a year when you are an independent contractor, freelancer,or an individual who runs their own business. You calculate and report self-employment tax on Schedule SE of your tax return.

How to Calculate Taxes as an Independent Contractor

To determine how much you owe in self-employment tax, you first calculate your business's net profit or loss on Schedule C.

• Enter the income you have earned in Part I.
• List your tax-deductible expenses in Part II.
• Calculate your business's net profit or loss by subtracting the tax deductions from your income.

You pay a 15.3% self-employment tax on your net profit. You deduct 50% of your self-employment tax on Schedule 2 of your personal tax return.

How to Pay Self-Employment Tax

Generally, independent contractors must make quarterly estimated tax payments throughout the year. Use your prior year’s tax return and Form 1040-ES to calculate how much you must send each quarter. If you still owe self-employment tax when you prepare your return, you can remit this when you file. 

Navigate Independent Contractor Tax Complexities

Navigating tax season as an independent contractor requires understanding the fundamental reporting requirements and tax liability for your situation. Take advantage of deductions, pay self-employment tax and make sure to submit quarterly estimated tax payments to stay compliant with the IRS.

Frequently Asked Questions

Related content: How Much is Federal Income Tax?