How Much Tax to Pay as Contractor
As a contractor, it`s essential to know how much tax you`re required to pay to avoid any surprises at tax time. Whether it`s your first time working as a contractor or you`re a seasoned professional, understanding your tax obligations can help you budget for the future and stay compliant with the law.
What Taxes Do Contractors Need to Pay?
As a contractor, you`re responsible for paying two main types of taxes: income tax and self-employment tax. Income tax is the tax you pay on your earnings from your work as a contractor. This tax is due at the federal, state, and local levels.
Self-employment tax is a tax that contractors pay to fund Social Security and Medicare. The self-employment tax rate is 15.3%, which is composed of 12.4% for Social Security and 2.9% for Medicare. This tax is based on your net income as a contractor.
How Much Income Tax Do Contractors Need to Pay?
The amount of income tax you`ll pay as a contractor depends on your taxable income and tax bracket. Taxable income is the total amount of money you earn from your work as a contractor, minus your allowable deductions. Tax brackets are a range of income levels that determine the percentage of tax you`ll pay on your taxable income.
For example, if you`re a single filer, the tax brackets and rates for 2021 are as follows:
– 10% on taxable income up to $9,950
– 12% on taxable income over $9,950 up to $40,525
– 22% on taxable income over $40,525 up to $86,375
– 24% on taxable income over $86,375 up to $164,925
– 32% on taxable income over $164,925 up to $209,425
– 35% on taxable income over $209,425 up to $523,600
– 37% on taxable income over $523,600
If you`re married filing jointly, the tax brackets and rates for 2021 are as follows:
– 10% on taxable income up to $19,900
– 12% on taxable income over $19,900 up to $81,050
– 22% on taxable income over $81,050 up to $172,750
– 24% on taxable income over $172,750 up to $329,850
– 32% on taxable income over $329,850 up to $418,850
– 35% on taxable income over $418,850 up to $628,300
– 37% on taxable income over $628,300
To calculate your income tax as a contractor, you`ll need to determine your taxable income and then use the tax brackets and rates to find the percentage of tax you`ll owe.
How Much Self-Employment Tax Do Contractors Need to Pay?
To calculate your self-employment tax as a contractor, you`ll need to use Schedule SE (Form 1040) to determine your net income and the associated tax.
The self-employment tax rate is 15.3% of your net income, which is composed of 12.4% for Social Security and 2.9% for Medicare. However, you`ll only pay Social Security tax on the first $142,800 of your net income in 2021. Any income above this amount will only be subject to the 2.9% Medicare tax.
For example, if your net income as a contractor is $100,000, your self-employment tax would be $15,300 ($100,000 x 15.3%). You can take a deduction for half of your self-employment tax on your income tax return.
Conclusion
Knowing how much tax to pay as a contractor is essential to stay compliant with the law and avoid any surprises at tax time. As a contractor, you`ll need to pay income tax and self-employment tax. Calculating your tax obligations may seem overwhelming, but working with a tax professional or using tax software can help you navigate the process and ensure you`re paying the correct amount.
