Contractor Tax Guide

A self-employed contractor pays federal income tax on net profit, self-employment tax (Social Security and Medicare, 15.3% combined on most net earnings), and usually state income tax. If you have employees, add payroll taxes on top. Sales tax may also apply to materials or, in some states, to labor — rules vary widely by state and even by whether the job is residential or commercial.

Because taxes aren't withheld from your income the way they are from a paycheck, the IRS expects estimated payments four times a year. Miss them and you'll owe an underpayment penalty on top of the tax itself, even if you pay everything by April 15. Most contractors set aside 25-30% of net profit into a separate account specifically for taxes so the quarterly payment is never a scramble.

Vehicle mileage or actual expenses, tools and equipment, materials, a home office if you genuinely use one for admin work, insurance premiums, and a portion of your phone and software subscriptions are all legitimate deductions that lower the profit you're taxed on. Keeping receipts and using bookkeeping software from day one — not scrambling every March — is the difference between capturing all of them and leaving money on the table.

Run your numbers through our Contractor Tax Calculator to get a sense of your total tax burden before you set your quarterly savings rate.