If you’re a self-employed contractor in Illinois, you must pay Illinois self-employment tax and income tax if your net earnings or profit are $400 or more. As a rule, putting aside 20% to 30% of your total income to pay your taxes is advisable. As a contractor, you generally need to pay estimated tax quarterly and file an annual tax return.
You’re considered self-employed if you operate a business or trade as an independent contractor or sole proprietor, are a partner in a business or trade, or are in business for yourself, whether as a gig worker or in a part-time business. In this article, we outline what taxes you must pay.
Self-employment tax is your contribution toward Social Security and Medicare. When you have a regular job, this tax is typically split, with the employer and employee paying half each. Self-employed contractors must pay the whole amount. The tax rate is 15.3% of your net earnings, of which 12.4% is for Social Security and 2.9% is for Medicare.
The Social Security tax applies to the first $160,200 profit for the 2023 tax year. If your profit exceeds $200,000 ($250,000 for joint filing), you may also be liable for an additional 0.9% Medicare tax. You pay your self-employment by filing Schedule SE Form 1040 or 1040-SR.
To determine whether you need to pay self-employment tax and income tax, you first need to calculate your business’s net profit or loss by subtracting your business expenses from your income. If your earnings are more than your expenses, the difference is your net earnings. If your income is less than your expenses, you’ve made a net loss. You can normally deduct a loss from your gross income.
As self-employed people don’t have an employer withholding Social Security and Medicare taxes, estimated quarterly tax is used to pay these taxes. Use Form 1040-ES, Estimated Tax for Individuals, to determine whether you need to make quarterly estimated tax payments as an independent contractor and calculate your tax liability. You’ll need your previous year’s tax return to complete the form.
You’ll have to estimate your annual income if it’s your first year as a contractor. If you estimate your profit too high or too low, you can fill out Form 1040-ES to reassess your next quarter’s taxes. You can make your estimated tax payments with the Electronic Federal Tax Payment System or use the blank vouchers found in Form 1040-ES and mail your payments.
Making a mistake on your taxes or paying late can be costly. If you find it a chore to prepare your income and self-employment taxes, consider using Pasquesi Sheppard’s tax preparation services in Chicago, Illinois. Using a professional service can save you money in the long run.
The first step in figuring out your tax is to calculate your profit for the year by subtracting your business expenses from your gross profit. Typically, 92.35% of your net income is liable for self-employment tax. Once you’ve calculated how much of your net income is liable for tax, apply the 15.3% self-employment tax rate.
Don’t forget that only the first $160,200 is liable for the Social Security part of the tax. If you only earned a small profit or made a loss, use Form 1040 to determine your net income.
If you’ve made or received a business payment as a contractor, you’ll probably need to file a 1099 form, also known as an information return. If you made a business payment, you’ll need to fill out a 1099 form and send copies to the IRS and the individual or business you paid. Similarly, if you received a business payment, the person or business that paid you will send you and the IRS a copy of the 1099 form.
The IRS will be aware that you received the payment, so you’ll need to report it on your income tax return. You should receive the 1099 form from the payer in January or February of the tax year following receipt of the payment. When you get a 1099 form, you don’t necessarily owe tax on the income, as other deductions might offset some or all of it. There are many types of 1099 forms, depending on the type of payment.
As a self-employed contractor, you might qualify for certain tax deductions against business expenses. These deductions reduce the amount of taxable income. Let’s look at some of the most common examples.
If you use part of your home exclusively to run your business, you can get a tax deduction for that portion of your home. You can deduct a percentage of your mortgage or rent, electric and heating, maintenance, and property taxes. You need to measure how many square feet of your home are used to run your business and calculate that figure as a percentage of your home. You can then deduct that percentage of your household expenses.
When you use your car for business, you can deduct tax for the mileage you do. The rate for 2023 is 65.5 cents per mile. You’ll need to keep a log of your business mileage, as you might be audited.
Self-employment tax is considered a business expense. You can deduct half of your self-employment tax against your income tax using Form 1040.
Keeping on top of running your business and preparing your taxes can take up a significant amount of your time — time you could otherwise be spending working to make a profit. At Pasquesi Sheppard in Lake Forest, Illinois, we offer business consulting services, where a consultant works with you to solve problems and help your business thrive. If you’d like help working out how much tax you need to pay as a contractor in Illinois, contact us today for a consultation.