People who perform services for a company are considered independent contractors if they are not employees of that company. For tax purposes, the Internal Revenue Service considers people who perform work as independent contractors to be self-employed. Regardless of whether it is a domestic or a foreign company that pays an independent contractor, IRS tax rules apply.
Definition of Independent Contractor
An independent contractor can perform any service for a company, including work that an employee might otherwise perform. That includes services provided by people in numerous occupations, such as accountants, contractors and subcontractors, doctors, lawyers, photographers and writers. The key is that the person performing the work is an independent contractor if he has freedom regarding the details of how he performs the services.
Taxing Independent Contractor Earnings
Money earned by independent contractors performing services for a company is taxed as self-employment income. As such, the earnings are subject to the self-employment tax as well as federal and applicable state income taxes. The self-employment tax refers only to Social Security and Medicare taxes. The self-employment tax was reduced by 2 percent to 13.3 percent for 2011 by the 2010 Tax Relief Act. That consists of 10.4 percent for Social Security and 2.9 percent for Medicare.
Performing Work for Foreign Companies
In general, international tax rules call for taxing the income earned by an individual based on the country where he performs the work rather than the country where the company is located. Therefore, if the independent contractor performed the work in the U.S., the tax rules of the IRS apply to that income, even if the work the independent contractor performed was for a foreign company. In addition, if an independent contractor who is an American citizen performs work in another country, that person generally would pay taxes in that other country on the income. However, the IRS generally allows an American citizen to deduct from his federal tax return any income taxes paid to another country.
Tax Basics for Independent Contractors
Because the IRS treats independent contractors as self-employed and as a small business, tax rules require them to fill out a Schedule C tax form to report the income. This form allows an independent contractor to list his income from all self-employment as well as any associated expenses and then to declare the profit or loss on his federal income tax form. In addition, IRS tax rules require independent contractors to make quarterly payments of their estimated income and self-employment taxes during the year.
- IRS.gov: Independent Contractor (Self-Employed) or Employee?
- IRS.gov: Independent Contractor Defined
- IRS.gov: Topic 554 - Self-Employment Tax
- Fayetville State University; Week Five Source Jurisdiction and Rules; J Balogun
- IRS.gov: Self-Employment Tax (Social Security and Medicare Taxes)
- Internal Revenue Service. "Understanding Employee vs. Contractor Designation." Accessed Oct. 28, 2019.
- Internal Revenue Service: "IRS Issues Standard Mileage Rates for 2019." Accessed Oct. 28, 2019.
Jeanne Young began writing professionally in 2000. She was the government reporter for a daily newspaper in central Florida. Young has also covered general assignment and the business, health, science, environment and education beats for newspapers and a wire service, and written about money and politics. She holds a Bachelor of Arts in English from the University of South Florida.