Taxes for Subcontractors: A Comprehensive Guide

If you’re a subcontractor, navigating taxes can be daunting. Unlike traditional employees, subcontractors are responsible for managing their taxes independently, which can be challenging but empowering once you understand the process. In this guide, we’ll break down everything subcontractors need to know about taxes, so you can stay compliant and avoid any last-minute surprises.

Call Turner Business Solutions at (316) 285-0125 to speak to a tax professional that can assist with your taxes. You can also schedule a free consultation online.

1. Understand Your Tax Status: Subcontractor vs. Employee

The first thing you need to confirm is your status as a subcontractor. As a subcontractor, you are considered an independent contractor. This distinction is crucial because it impacts how you handle your taxes. Unlike employees, who have taxes withheld by their employers, independent contractors receive their full payment upfront and are responsible for calculating and paying taxes on their own.

2. Self-Employment Tax

As a subcontractor, you’re required to pay self-employment taxes. This covers Social Security and Medicare contributions, which are typically shared between employees and employers. For independent contractors, the rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). This tax is paid through Schedule SE along with your annual tax return.

3. Quarterly Estimated Taxes

Since no employer is withholding taxes for you, you’re responsible for paying quarterly estimated taxes. These payments cover your federal income tax, self-employment tax, and possibly state taxes depending on where you live.

You’ll need to estimate your total tax liability for the year and divide it into four payments, due on:

• April 15

  
  

• June 15

  
  

• September 15

  
  

• January 15 (of the following year)

  
  

Failure to make these payments can result in penalties, so it’s crucial to stay on top of them.

4. Keep Accurate Records

One of the keys to handling taxes as a subcontractor is keeping detailed records of your income and expenses. This will make tax filing easier and help you claim deductions that reduce your tax burden. Common expenses you might be able to deduct include:

• Equipment and supplies

  
  

• Mileage for business travel

  
  

• Home office expenses (if you have a dedicated space for work)

  
  

• Business insurance

  
  

• Marketing and advertising costs

  
  

Make sure to save receipts and document any expense related to your work.

5. File a Schedule C

Subcontractors typically file a Schedule C (Profit or Loss from Business) to report income and expenses. The net income from your Schedule C is then transferred to your Form 1040, which is your individual tax return. Be sure to categorize your expenses accurately, as this can significantly reduce your taxable income.

6. Understand 1099 Forms

As an independent contractor, you’ll receive a 1099-NEC form from each client who paid you more than $600 during the year. This form reports the total income you received from that client. Even if you don’t receive a 1099 form, you are still required to report all income earned throughout the year.

7. Tax Deductions for Subcontractors

One advantage of being a subcontractor is the ability to claim a variety of tax deductions that employees cannot. Some key deductions include:

• Home office deduction: If you use part of your home exclusively for business.

  
  

• Health insurance: You may be able to deduct premiums if you're paying for health insurance out of pocket.

  
  

• Retirement contributions: Contributions to SEP-IRA or solo 401(k) plans are tax-deductible.

  
  

• Vehicle expenses: You can deduct either actual vehicle expenses (like gas and maintenance) or take a standard mileage deduction.

  
  

These deductions can help lower your taxable income, reducing the amount you owe.

8. Work with a Tax Professional

Taxes for subcontractors can be complicated, especially as your business grows. It’s a good idea to work with a tax professional who can help ensure you’re taking advantage of all available deductions, filing the proper forms, and avoiding any penalties.

9. Set Aside Money for Taxes

Since you’re not having taxes automatically withheld from your paychecks, it’s crucial to set aside money for taxes throughout the year. A common recommendation is to save at least 25-30% of your income to cover federal and state taxes, self-employment taxes, and any other tax liabilities.

10. State and Local Tax Considerations

Don’t forget about state and local taxes. Depending on where you live and work, you may be subject to state income tax, local taxes, or both. Make sure to check the specific requirements in your area.

Final Thoughts

Being a subcontractor comes with many freedoms, but it also means taking on the responsibility of managing your taxes. By understanding the basics of self-employment tax, keeping accurate records, and staying on top of quarterly payments, you can confidently navigate tax season and avoid unwanted surprises.

If you’re feeling overwhelmed, remember that professional tax help is always an option, especially as your income and business complexity increase. Give us a call at (316) 285-0125 or schedule a free consultation online.