An independent contractor is an individual or business that provides services to another individual or business. The independent contractor is a separate business entity and is not considered an employee. Some examples of independent contractors are consultants, agents, or brokers. If you hire a maintenance company to clean your office, the company is an independent contractor. The IRS has established tests to determine whether a worker is an independent contractor or an employee
Independent Contractors and Income Taxes
An independent contractor working for someone else must sign Form W-9 at hire, providing a taxpayer ID number (Social Security Number, Employer ID, or other). If the employer of an independent contractor doesn't have a valid tax ID on file, the employer must withhold taxes from payments made to the contractor (called backup withholding). If a valid tax ID is provided, no federal income taxes need to be withheld from the contractor's payments.
For income tax reporting, an independent contractor usually receives Form 1099-MISC at the end of a year from each company for whom work is done. The 1099-MISC shows income and any withholding (usually none, unless backup withholding is required). Since the independent contractor is self-employed, he or she will file income taxes on Schedule C unless a different business type has been selected.
Paying Income Taxes
Unless the independent contractor has paid income taxes through backup withholding, no taxes have been paid during the year, so the contractor must make estimated tax payments each quarter.
Independent Contractors and Self-Employment Taxes
Because an independent contractor is not an employee and does not receive a paycheck, no Social Security and Medicare taxes (self-employment taxes) are withheld from payments. So the independent contractor must pay self-employment taxes at the end of the year, along with his or her personal tax return.
Independent Contractor vs. Sole Proprietor
Independent contractor status has to do with status with employers. That is, an independent contractor is not an employee. The term "sole proprietor" is a tax category, for federal income tax purposes. An individual can be an independent contractor and file taxes as a sole proprietor.