If you`re a subcontractor or considering becoming one, you may be wondering if you need to pay taxes. The short answer is yes, subcontractors do have to pay taxes. However, the specific types of taxes and how much you owe depend on a few factors.
First, it`s important to understand the difference between an employee and a subcontractor. An employee works directly for a company or organization and receives a regular paycheck. The employer is responsible for withholding income taxes, Social Security, and Medicare taxes from the employee`s pay and paying their portion of these taxes to the government.
On the other hand, a subcontractor is hired by a company or individual to perform specific tasks or services. Subcontractors are not employees, and therefore the individual or company hiring them is not responsible for withholding taxes from their pay. Instead, subcontractors are responsible for paying their own taxes.
Subcontractors must pay self-employment taxes, which include Social Security and Medicare taxes. The self-employment tax rate for 2021 is 15.3% of your net earnings (income minus expenses). This rate includes both the employer and employee portions of Social Security and Medicare taxes.
In addition to self-employment taxes, subcontractors must also pay income taxes on their earnings. The amount of income taxes you owe depends on your total income and deductions. If you earn more than $400 in a year from subcontracting, you will need to file a tax return and pay any taxes owed.
It`s important to keep accurate records of all your earnings and expenses as a subcontractor. This will help you calculate your income taxes and ensure you are paying the correct amount of self-employment taxes. You may also be able to deduct certain expenses, such as equipment and supplies, from your taxable income.
In summary, subcontractors do have to pay taxes, including self-employment taxes and income taxes. It`s important to understand your tax obligations and keep accurate records of your earnings and expenses. If you`re unsure about your tax obligations as a subcontractor, consider consulting with a tax professional for guidance.