Independent contractor taxes: What employers should know

Hiring independent contractors in the United States? If so, your tax responsibilities differ from those for regular employees—and failing to meet them could lead to misclassification claims, financial penalties, and back taxes.

In this guide, we'll explain how independent contractor taxes work in the U.S., who’s responsible for paying them, and which Internal Revenue Service (IRS) forms your business needs to file to stay compliant.

Who qualifies as an independent contractor?

Many U.S. businesses rely on contractors to fill short-term gaps or bring in specialized skills without adding to their employee headcount. But working with contractors comes with important tax and compliance responsibilities. 

The key factor that determines whether someone qualifies as an independent contractor is how much control the individual has over the work they do and how they do it. The IRS looks at three areas to classify a hire as either an employee or independent contractor: behavior control, financial control, and the overall relationship between the business and the worker. 

To determine whether the hire is an employee or an independent contractor, here’s what to ask yourself:

• Behavioral control: Does your company specifically mandate how the worker performs their tasks?
• Financial control: Does your company control the business aspects of the worker's job, such as providing tools and equipment, reimbursing expenses, and determining pay rates?
• Relationship of the parties: Does the employer provide benefits, such as a pension plan, time off, or insurance? Is the relationship ongoing, and is the work essential to business operations?

If you answered yes to one or more of these questions, the worker likely qualifies as an employee, not a contractor. When in doubt, it's best to check with a legal or tax expert.

Why classification matters

Misclassifying a worker can lead to serious consequences for your business. According to the IRS, employers must withhold and pay income tax, Social Security and Medicare taxes, and unemployment taxes for employees. In contrast, independent contractors are responsible for making quarterly tax payments to the IRS and paying self-employment tax when they file their taxes for the year. 

Despite what’s in a contract, if an employer maintains sufficient control over how an individual does their work, the IRS generally considers them an employee, not an independent contractor. 

For example, let’s say your company hires a copywriter and has the authority to instruct them when and where they must work. According to IRS regulations, they qualify as an employee. That means your business needs to withhold federal and state income taxes, pay Social Security and Medicare taxes, and offer benefits such as healthcare and retirement plans, if available. Employers can also limit or prohibit employees from pursuing outside work.  

Conversely, writers who are classified as independent contractors set their own schedule and choose where they work. They’re responsible for managing their tax payments, including quarterly estimated tax payments and self-employment tax. They don’t receive employee benefits and have more freedom to take on other clients or projects.

Who pays independent contractor taxes?

Let’s further break down how taxes work for employees versus independent contractors: 

As mentioned, businesses handle tax withholding for their employees. Employers deduct federal, state, and local income taxes from each paycheck, usually on a set payment schedule. Employers also pay payroll taxes like Social Security and Medicare on the employee’s behalf.

Independent contractors, on the other hand, pay federal, state, and local income taxes based on their net income after deductions and expenses. Contractors also pay self-employment tax, which covers Social Security and Medicare. As of 2025, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). Contractors make these payments themselves, often through quarterly estimated tax payments. If they underpay when they file their taxes, the IRS may charge a penalty when they file their annual tax return.

In addition to managing tax payments, businesses and independent contractors must complete specific IRS forms when they begin working together. These forms document the relationship and report payments to the IRS.

Here are the three IRS forms every business should know when working with independent contractors in the U.S.:

Form W-9 (Request for Taxpayer Identification Number and Certification)

Independent contractors complete Form W-9 at the start of the working relationship. It includes their legal name, address, and taxpayer identification number (TIN), which is either their Social Security number (SSN) or employer identification number (EIN). Businesses need this information to report payments to the IRS.

Form 1099-NEC (Nonemployee Compensation)

Businesses must complete Form 1099-NEC each year to report payments of $600 or more to an independent contractor. It includes the contractor's personal information from the W-9 and the total amount the business paid them during the tax year.

Form 1096 (Annual Summary and Transmittal of U.S. Information Returns)

Form 1096 serves as a cover sheet for all 1099 forms that a business files for the year, including 1099-NEC forms. It summarizes the total number of 1099s submitted and the combined amount reported on those forms. The IRS doesn’t require businesses to file Form 1096 if they file their 1099s electronically.

How do independent contractors pay taxes?

The IRS requires independent contractors to estimate taxes and make quarterly estimated tax payments if they expect to owe $1,000 or more for the year. These payments are due annually on April 15, June 15, September 15, and January 15. If an independent contractor underpays, which often happens when they fail to make one or more of their quarterly payments, the IRS will likely penalize them when they file their year-end tax return. 

Self-employed individuals must file taxes and pay the self-employment tax if they earn $400 or more in a year. 

An independent contractor’s annual tax return typically consists of the following tax forms:

Form 1040

Form 1040 is a basic IRS tax form that workers, including employees and independent contractors, use to report their income (including self-employment income), take basic tax deductions and credits, and determine if they owe taxes or will receive a refund. Typically, independent contractors receive 1099 forms from the companies that paid them $600 or more in a tax year. They use these forms to report their income on Form 1040. 

Schedule C

Independent contractors use Schedule C to calculate and report profit and loss for their business. Self-employed individuals use this form to claim expenses related to their business activity. 

Schedule SE

Part of Form 1040, independent contractors calculate their self-employment tax using Schedule SE. 

Form 1040-ES for quarterly estimated taxes

Independent contractors use Form 1040-ES to calculate and pay their quarterly estimated tax payments for a given tax year. 

Tax deductions for independent contractors

Independent contractors may be eligible for various tax deductions to reduce their taxable self-employment income, such as the home office deduction for workspace expenses and the self-employment tax deduction. They can choose to itemize their deductions or take the standard deduction, depending on which option reduces their tax liability the most.

If an independent contractor uses part of their home exclusively for work, they can deduct a percentage of rent, utilities, and related expenses. Other typical expense-related deductions include professional subscriptions, computer hardware and software, and business-related travel and meals. 

The IRS allows independent contractors to deduct one-half of their self-employment tax when determining their adjusted gross income (AGI) on Form 1040. 

Tax deduction example

Let’s say a graphic designer works from home and earns $75,000 a year from various projects as an independent contractor. They use a portion of their home exclusively for work and spend money on supplies and services needed to run their business. When filing taxes, they deduct $1,500 for home office expenses, $4,000 for a new laptop and software, and $1,000 for travel related to client projects. These deductions reduce the independent contractor’s taxable self-employment income to $68,500, lowering their overall tax bill.

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