Necessary Documents and Steps for Tax Filing as a Contract Employee in the US

If you're a contract employee, tax filing can seem intimidating, especially if you're handling it on your own. But by organizing your documents and following these steps, you can streamline the process and ensure you're in compliance with IRS regulations.

Two Categories of Contract Employees in the US

There are primarily two categories of contract employees in the United States. The first category is those who are regular employees of a contracting company. In this scenario, the company acts as the contractor, and the individual receives a W-2 form, with taxes typically withheld. The tax filing process is similar to that of a regular employee.

W-2 Form and Typical Tax Filing Process

For those who receive a W-2 form, the tax filing process is straightforward. The company that employs you will handle the withholding of taxes, and you'll receive the necessary forms to file your tax return.

More Complicated Scenario for True Contract Employees

The second category is individuals who contract their services out themselves. In this case, the life of a contract employee becomes much more complex. Here are the key steps and considerations:

Quarterly Estimated Tax Payments

A major requirement for independent contract employees is the need to make quarterly estimated tax payments to the Internal Revenue Service (IRS) and, if applicable, to the state level as well. This involves submitting payments four times a year, covering the first three quarters and the final quarter of the tax year.

1099 Form

At the end of the contract period, you should receive a 1099 form, which details the actual wages paid by the company for the contracted services. This form is critical for tax filing and must be kept for records.

Additional Tax Obligations

In addition to the quarterly estimated payments and the preparation of your 1099 form, you may need to itemize deductions and amortize the wear and tear on equipment. This mirrors the obligations of running any other type of business.

Benefits of Forming Your Own Company

While the process can be daunting, there are benefits to self-employment or forming your own company. Major companies like Apple, Google, and Facebook typically do not contract with individuals but only with companies. Therefore, if you wish to work for them, you'll need to be part of a company. Forming your own company can also ease the administrative burden and offer legal protection.

Handling Insurance and Other Taxes

As a contract employee, you are responsible for handling your own insurance, workman's compensation, and other taxes. This responsibility can be significant and time-consuming, especially if you don't have prior experience.

Seek Professional Advice

Given the complexity of tax filing for contract employees, seeking professional advice is highly recommended. Whether you opt to hire a tax professional or handle it yourself, understanding the process is crucial.

Professional Tax Preparation

For those who choose to handle their own tax filings, it's advisable to have a tax professional walk you through the preparation process at least for one quarter and one full tax filing. This can be costly but is often essential. The professional can provide detailed guidance, navigate complex tax scenarios, and ensure you're accurately reporting all necessary information.

Forming Your Own Company

Alternatively, forming your own company can simplify the tax process and offer additional benefits. By doing so, you can deduct more expenses, such as hiring an accountant, as business expenses, which can result in lower overall tax liability.

Conclusion

The tax-filing process for contract employees in the US can be overwhelming, but with the right guidance and documentation, you can successfully navigate the complexities. Whether you choose to work with a professional or manage the process yourself, taking the time to understand and adhere to IRS guidelines is crucial for staying compliant and minimizing potential penalties.