Contractor Tax Planning
Tax planning isn't something you do once a year — it's an ongoing process that affects your cash flow, business decisions, and bottom line. This guide covers the essentials every contractor needs to know.
Disclaimer: This guide provides general information only. Tax situations vary, and you should consult a qualified tax professional for advice specific to your situation. All information is based on current IRS guidelines as of the publication date.
Quarterly Estimated Taxes
If you expect to owe $1,000 or more in taxes for the year, you're required to make quarterly estimated tax payments. Missing these payments results in penalties and interest.[1]
2024-2025 Quarterly Due Dates
Source: IRS Publication 505
How Much to Pay
The IRS offers two safe harbors to avoid underpayment penalties:[1]
- 1.100% of last year's tax (110% if your AGI was over $150,000) — Pay at least this much in quarterly payments and you won't owe penalties, even if you owe more at tax time.
- 2.90% of current year's tax — If you can accurately estimate your current year tax, pay at least 90% quarterly.
Most contractors use the "100% of last year" method because income can be unpredictable.
Self-Employment Tax
As a contractor, you pay both the employer and employee portions of Social Security and Medicare taxes — a combined 15.3% on net self-employment income up to the Social Security wage base ($168,600 in 2024), plus 2.9% Medicare on income above that.[4]
Self-Employment Tax Rates (2024)
You can deduct half of self-employment tax from your income tax.
Common Contractor Deductions
The IRS allows you to deduct "ordinary and necessary" business expenses. For contractors, common deductions include:[2]
Vehicle Expenses
Standard mileage rate (67¢/mile in 2024) or actual expenses. Keep a mileage log.
Tools & Equipment
Section 179 allows immediate deduction up to $1.16M (2024).[3]
Home Office
Simplified method: $5/sq ft up to 300 sq ft ($1,500 max). Must be exclusive use.
Insurance Premiums
Liability, workers' comp, and health insurance (if self-employed) are deductible.
Subcontractor Payments
Fully deductible. Issue 1099s for payments over $600/year.
Professional Services
Accounting, legal, and consulting fees are deductible business expenses.
Entity Structure Considerations
Your business structure affects how you're taxed. Common options for contractors:
Sole Proprietorship / Single-Member LLC
Simplest structure. All income passes through to your personal return. You pay self-employment tax on all net income.
S Corporation
Can reduce self-employment tax by paying yourself a "reasonable salary" and taking remaining profits as distributions (not subject to SE tax). Requires more administration. Generally beneficial when net income exceeds $60-80K.
C Corporation
Rarely optimal for contractors due to double taxation. May make sense for very large operations or specific planning scenarios.
Year-End Tax Planning Checklist
Review these items before December 31:
- ☐Estimate your total income and tax liability
- ☐Consider accelerating deductions (buy equipment, prepay expenses)
- ☐Defer income if possible (delay invoicing until January)
- ☐Max out retirement contributions (SEP-IRA, Solo 401k)
- ☐Review Section 179 equipment purchases
- ☐Gather receipts and documentation
- ☐Verify subcontractor information for 1099s
- ☐Review entity structure for next year
Retirement Account Options
Self-employed contractors have excellent retirement savings options that also reduce taxable income:
SEP-IRA
Contribute up to 25% of net self-employment income, max $69,000 (2024). Simple to set up, deadline is tax filing date.
Solo 401(k)
Higher contribution limits than SEP-IRA if income is under ~$350K. Allows employee + employer contributions. More complex to administer.
SIMPLE IRA
Lower limits ($16,000 employee + 3% match in 2024) but easier if you have employees.
Sources
Internal Revenue Service. Tax Withholding and Estimated Tax.
Internal Revenue Service. Tax Guide for Small Business.
Internal Revenue Service. How To Depreciate Property (Section 179 and bonus depreciation).
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes).
U.S. Small Business Administration. Pay and File Business Taxes.