As a contractor, it`s important to understand what taxes you are responsible for paying. Unlike traditional employees who have taxes automatically deducted from their paychecks, contractors are responsible for calculating and paying their own taxes. In this article, we`ll explore the various taxes that contractors may be required to pay.

Self-Employment Tax

One of the most significant taxes that contractors must pay is the self-employment tax. This tax is similar to Social Security and Medicare taxes that traditional employees pay but is calculated differently for contractors. The self-employment tax rate is currently set at 15.3%, with the first 12.4% going to Social Security and the remaining 2.9% going to Medicare.

To calculate your self-employment tax, you`ll need to determine your net earnings from self-employment. This is calculated by subtracting your business expenses from your total income. Once you have your net earnings, you`ll multiply it by the self-employment tax rate to determine your tax liability.

Income Tax

In addition to the self-employment tax, contractors are also responsible for paying income tax on their earnings. The amount of income tax you`ll owe will depend on your total income, deductions, and credits. It`s important to keep accurate records of your income and expenses throughout the year to make filing your taxes easier.

Estimated Tax Payments

Since contractors don`t have taxes automatically deducted from their paychecks, they are required to make estimated tax payments throughout the year. These payments are made quarterly and are based on your estimated tax liability for the year. If you fail to make these payments or underpay your taxes, you may be subject to penalties and interest.

State and Local Taxes

In addition to federal taxes, contractors may also be required to pay state and local taxes. The specific taxes will vary depending on your state and local tax laws. Some common state and local taxes include sales tax, business tax, and property tax.

Final Thoughts

As a contractor, it`s essential to understand what taxes you are responsible for paying. By staying on top of your tax obligations and making timely payments, you can avoid penalties and interest charges. If you`re unsure about your tax obligations, consider speaking with a tax professional who can provide guidance and help you stay on track.