Independent Consultant Taxes: The Complete Guide    

Independent Consultants are experts in a particular field who get paid by clients for sharing their knowledge and domain expertise. Being a consultant is a good way to start one’s own business and work independently after gaining years of experience in the field. This way of self-employment has its own pros and cons. 

Remember, self-employment also means more tax liabilities which an individual has to bear responsibly on their own. As an independent consultant, you are liable to pay the federal income tax and self-employment tax along with state taxes (if applicable). With Beem, America’s first Al-powered Smart Wallet App, you’ll be able to file your taxes as independent consultants for free and with ease. If you have decided to adopt this mode of work or you are in this position already, make sure you are on top of all the tax rules for consultants. 

Independent Consultants and Taxes

According to the IRS, a person is self-employed if they are a business owner or independent consultant who provides services to other businesses. A self-employed or independent consultant usually gets paid the full amount from their clients without any tax deductions. This means that the onus of paying off tax liabilities will be entirely on them and not on the clients.

As per the tax rules for consultants and self-employed individuals, they have to pay both federal income taxes and self-employment taxes. If you are self-employed, the amount you owe in income tax will depend on which tax bracket your income falls in. The tax rates typically range from 10% to 37%. The self-employment tax rate is 15.3% which includes 12.4% for Social Security and 2.9% for Medicare. The self-employment tax is calculated on 92.35% of an individual’s net earnings.

also know about: Gift Tax

An Example Of How Taxes For Independent Consultants Work

Suppose your net annual profit income is $125,000. This will put you in the 24% tax bracket. So you’d pay 24% on the amount exceeding the threshold for the below bracket. That means, you pay:

$125,000 – $89,075 = $35,925 x 24% = $8,622

Similarly, you will pay the income tax on the rest of your net profits according to the tax bracket threshold. So you’d pay:

10% on the first $10,275 ($1,027.50)

12% on the next $31,500 ($3,780)

22% on the next $47,300 ($10,406)

In total, after calculating all of the taxes above, you’d owe $23,835.50.

Next, comes the self-employment tax. You can calculate it by taking 15.3% of 92.35% of your net profits. This means, you pay:

92.35% of $125,000 = $115,438 x 15.3% = $17,662

So, in sum, your total tax liability for the year would be $41,497.50. 

You can pay this annual tax bill by dividing it into four equal payments and sending estimated quarterly tax payments to the IRS. The due dates are April 18, June 15, September 15 and January 15.

Remember that in addition to federal taxes, you may also be subject to state taxes. To find out how much you’ll owe, check with your state tax boards.

Also know about: Tax Dependent

Tax Deductions For Independent Consultants

Deductible items enable you to bring down the sum of your total taxable income from self-employment, which would mean you’d owe less in taxes. The good news is almost everything a self-employed consultant purchases for their business is tax deductible as long as it is a reasonable expenditure. 

For example, if you earned $125,000 but spent $40,000 on deductible expenses, you could deduct the full cost from your taxes. So if you buy a $2,000 computer and use it 100% for your consulting business, you can deduct this business expense from your taxable income. Note that you cannot include personal expenses in deductibles.

Quick list of some typical deductions that independent consultants may be eligible for:

Operational Deductions

Self-employment tax deduction: You can deduct half of your self-employment tax annually.

Capital expenditures: These are the expenditures you make to set up your consulting firm, such as furniture or computers. Other expenses like internet service, utility bills and software that you need to run your firm.

Career development: You can get education tax credits if you’re enrolled in an eligible college program. The fees for webinars, seminars, conferences and professional certifications are all deductible.

Advertising and costs for client services: You can deduct any expenses incurred for client acquisition advertising, including building a website and purchasing gifts for clients.

Use of your home or vehicle for business purposes: If you work from home, you can deduct a percentage of your housing expenses. It includes rent, mortgage interest, insurance, utilities, depreciation and repairs.

Financial fees: Any charges you must pay to your bank or credit card provider are deductible.

Car expenses: With the significant exception of commuting, all transportation costs associated with your consulting business are tax deductible. Keep track of all your car expenses to determine your annual deduction. Otherwise, you can use the standard mileage rate. 

Business-Related Deductions

Business Travel: You are entitled to a tax deduction for your out-of-town trips for consulting work. They cover hotel or other lodging expenditures as well as flights or other travel charges. When traveling for work, you can only deduct 50% of the cost of meals.

Subscriptions: Magazine, journal, newsletter and other subscription fees that are necessary for your consulting firm can also be written off.

Long-Term Property: Consultants often invest in tangible personal property, such as computers, office furniture and business-related books, that lasts for longer than a year. The de minimis safe harbor (applicable to property that costs $2,500 or less) or 100% bonus depreciation (in force through 2022) can typically be used to write off the whole cost of such property in a single year. Instead of spreading it out over several years through annual depreciation deductions, this enables you to earn a sizable benefit in a single year. (See Section 179 Tax Deduction Limitations and First-Year Bonus Depreciation for more details.)

Legal and professional services: If you pay accountants, lawyers and professionals for services for your business, you can deduct the fees you pay them.

Insurance: Insurance that you purchase for your business, such as liability insurance or for property, is deductible. You can write off a portion of your homeowner’s insurance if you work from home. Also, self-employed individuals are permitted to deduct 100% of their health insurance premiums from their taxable income. Retirement savings programs and company insurance are some additional deductible costs.

Tracking Deductions

Keeping track of all of your expenses throughout the year can be challenging, but it is worth the effort. Ensure to take advantage of all the deductions you are entitled to avoid paying more in taxes than necessary.

Note The Deadlines

You need to submit the majority of the tax returns to the IRS by the deadline each year, which is April 18 this year. Independent consultants must submit Form 1040 or Form 1040-SR and attach the Schedule C document on which you’ve calculated your net profit or loss after deducting business expenses.

Your payment will be considered as received on time as long as it’s postmarked by the due date. You can also pay your dues online via IRS Direct Pay. If you pay late or less than the required amount, you may face penalties. The IRS can fine you if you underpay by more than 10%.

The due dates for estimated quarterly income taxes for the 2023 tax year are:

1st quarter: April 18

2nd quarter: June 15

3rd quarter: September 15

4th quarter: January 15

Key Takeaways

Becoming an independent consultant and self-employed can be quite an exciting and profitable business. Don’t be deterred, if you are intimidated by the tax rate for consulting services and complicated tax rules for consultants. As of now, you may have a full grasp of tax liabilities and are on top of tax planning. You can now better focus on your consulting business with a free mind and no nasty surprises from the tax office.