Contract work is any arrangement where you provide services as an independent business rather than as someone’s employee, and the taxes on contract work work differently in one big way: no one withholds anything for you. You owe regular income tax on your net earnings plus a 15.3% self-employment tax that covers Social Security and Medicare, and you send those payments to the IRS yourself in four quarterly installments. In exchange, you can deduct business expenses employees cannot, and you set your own methods and schedule.
Are You Actually a Contractor?
The tax rules only apply if you really are one. The IRS uses a common-law test built around a single question: does the person paying you control how the work gets done, or only what result you deliver? If they control the result but not the method, you’re generally an independent contractor. If they can direct when, where, and how you work, you’re likely an employee no matter what your agreement says.1Internal Revenue Service. Employee (Common-Law Employee)
The IRS weighs three categories of facts: behavioral control (who decides how, when, and where the work happens), financial control (who supplies tools, whether you have unreimbursed expenses, whether you can profit or lose on the job, whether you work for multiple clients), and the type of relationship (written contract, benefits, whether the work is a defined project or an ongoing core function of the business).2Internal Revenue Service. Behavioral Control No single factor decides it. A contract calling you an “independent contractor” won’t rescue the relationship if every other fact points to employment.1Internal Revenue Service. Employee (Common-Law Employee)
One boundary worth naming: the Department of Labor uses a broader “economic reality” test under the Fair Labor Standards Act, which weighs opportunity for profit or loss, investment in equipment, and permanence of the relationship. You can be a contractor for federal tax purposes and still count as an employee for wage-and-hour protections.3U.S. Department of Labor. Fact Sheet 13: Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA)
Self-Employment Tax: The 15.3%
In a regular job, your employer pays half of your Social Security and Medicare taxes and you pay the other half through payroll withholding. When you’re on your own, you pay both halves. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax
The Social Security portion only applies up to an annual wage base, set at $184,500 for 2026. Net self-employment earnings above that cap aren’t hit with the 12.4%.5Social Security Administration. Contribution and Benefit Base The 2.9% Medicare portion has no ceiling and applies to every dollar of net self-employment income.
High earners pay more. An extra 0.9% Medicare surtax kicks in on self-employment income above $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately, pushing the Medicare rate to 3.8% above those levels.6Internal Revenue Service. Topic No. 560, Additional Medicare Tax
One built-in break softens the hit. You can deduct half of your self-employment tax when figuring adjusted gross income. It’s not an itemized deduction; it comes off the top and reduces your income tax base. You calculate self-employment tax on Schedule SE and take the deduction on Form 1040.
Reporting Your Income
Any business that pays you $600 or more in a year must send you a Form 1099-NEC reporting what they paid.7Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025) But you owe tax on all your self-employment income whether or not a 1099 shows up. The form is a reporting tool, not the thing that creates the tax. If your net self-employment earnings hit $400 or more for the year, you have to file a return.8Office of the Law Revision Counsel. 26 USC 1402 – Definitions
You report your business income and expenses on Schedule C, filed with your Form 1040. Your net profit from Schedule C flows both into your income tax calculation and into the self-employment tax calculation on Schedule SE.
Quarterly Estimated Payments
Because nothing is being withheld from your pay, the IRS wants its money as you earn it. For a calendar-year taxpayer, estimated payments are due April 15, June 15, September 15, and January 15 of the following year.9Internal Revenue Service. Publication 509 (2026), Tax Calendars If a due date lands on a weekend or federal holiday, it shifts to the next business day.
Each payment should cover roughly a quarter of your expected annual liability, income tax and self-employment tax combined. The first year is the hardest because you’re estimating income you haven’t finished earning.
You avoid an underpayment penalty if you hit either of two safe harbors: pay at least 90% of what you actually owe for the current year, or pay 100% of what you owed for the prior year. That prior-year figure rises to 110% if your adjusted gross income was above $150,000.10Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax There’s also no penalty if you’ll owe less than $1,000 after withholding and credits. For a new contractor with uneven income, the prior-year safe harbor is often the easiest path: divide last year’s total tax by four and send that in every quarter.
Filing the annual return late carries its own separate penalty: 5% of the unpaid tax for each month the return is overdue, capped at 25%.11Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
Deductions That Lower What You Owe
Contractors can deduct expenses employees generally cannot. On Schedule C, common deductible costs include professional software and tools, business mileage, office supplies, legal and accounting fees, business insurance, and advertising. Each expense has to be both ordinary for your line of work and necessary to run your business.12Internal Revenue Service. Instructions for Schedule C (Form 1040)
Home Office
If you use part of your home exclusively and regularly for business, you can deduct a share of your housing costs. The space has to be your principal place of business or somewhere you regularly meet clients. A kitchen table you also eat at doesn’t qualify.13Internal Revenue Service. Topic No. 509, Business Use of Home
Two methods are available. The simplified method gives you $5 per square foot, capped at 300 square feet, for a maximum of $1,500.13Internal Revenue Service. Topic No. 509, Business Use of Home The regular method lets you deduct the actual business percentage of rent or mortgage interest, utilities, insurance, and repairs, based on the share of square footage you use for work. It can be worth more but requires better records.
Qualified Business Income
Under Section 199A, eligible self-employed individuals can deduct up to 20% of their qualified business income from taxable income.14Internal Revenue Service. Qualified Business Income Deduction On $100,000 of net profit, that’s a $20,000 reduction to taxable income. The full deduction is available below certain income thresholds — $201,750 for most filers and $403,500 for married couples filing jointly in 2026 — and phases out above them. Specified service businesses (law, medicine, accounting, consulting, and similar) face added limits once income crosses those thresholds.
Half of Your Self-Employment Tax
As noted above, half of what you pay in self-employment tax comes off your gross income before you calculate income tax. This one applies automatically once you fill out Schedule SE; don’t overlook it.
If You Think You’ve Been Misclassified
If a company treats you as a contractor but controls your work like an employee, the classification may be wrong, and it costs you. You’re paying the full 15.3% self-employment tax instead of splitting Social Security and Medicare with an employer, and you’re outside protections like unemployment insurance, workers’ compensation, and overtime.
You can file Form SS-8 with the IRS asking for a formal determination of your status. Either the worker or the hiring company can submit it. The IRS contacts both sides, reviews the facts, and issues a determination letter that binds the IRS unless the underlying facts change. The determination only covers federal tax classification and doesn’t resolve state labor claims, but it’s a useful first step. Mail Form SS-8 separately from your tax return; attaching it to a return delays processing.