Independent contractor taxes in Pennsylvania: freelancer tax management guide

Working as an independent contractor in Pennsylvania can give you the freedom and flexibility to work with clients on your terms.

It might, however, seem overwhelming to start your own business if you are not familiar with the local laws and managing state taxes in Pennsylvania. Whether your clients are local to your area or located around the world, you may find it tedious to calculate and withhold taxes. Whether it’s filing taxes, creating invoices, or tracking international payments, keeping track of repetitive tasks can eat up a lot of your time.

But working as an independent contractor in Pennsylvania does not ‌have to be daunting.

After reading this guide on independent contractor taxes in Pennsylvania, you’ll have a better understanding of managing and paying taxes as a freelancer in the Keystone State. This article will discuss how to file independent contractor taxes in Pennsylvania, explain tax rates, taxable amounts, and the forms needed to file your self-employment taxes.

How do independent contractor taxes work in Pennsylvania?

To file and pay taxes, independent contractors in Pennsylvania must file a Pennsylvania personal income tax return. 

What are the self-employed tax rates in Pennsylvania?

The personal income tax rate in Pennsylvania is 3.07% of the individual's taxable income. This applies to both resident and nonresident individuals, as well as partnerships, S corporations, business trusts, and limited liability companies not federally taxed as corporations, estates, and trusts. 

What amount of income is taxable for self-employed workers in Pennsylvania?

Independent contractors (also known as freelancers) in Pennsylvania who earn more than $33 in total gross taxable income during the calendar year must file a Pennsylvania personal income tax return. Even if no tax is due or the individual qualifies for special tax forgiveness (SP), they must file a tax return for the year.

The state taxes eight income classes as follows:

1. Compensation

2. Interest

3. Dividends

4. Net profits from operating a business, profession, or farm

5. Net income or gains from property dispositions

6. Net income or gains from rents, patents, copyrights, and royalties

7. Income earned through estates or trusts

8. Gambling and lottery winnings

Any amount of income in any of these eight categories is taxable income as long as it generates $1 or more in tax, even if no tax is due.

What are the relevant contractor tax forms in Pennsylvania?

Independent contractors in Pennsylvania should report their earned income and incurred expenses while conducting business on PA-40 Schedule C. To do so, the freelancer will require one or more of the IRS tax documents listed below, which each client (or company for whom the independent contractor performed work) must provide:

• 1099-K. Independent contractors who earn more than $600 in client payments during the calendar year should receive Form 1099-K, which includes a breakdown of their annual gross earnings.

• 1099-NEC. If an independent contractor received more than $600 in any monetary incentives, such as promotional referrals, sign-up bonuses, or other miscellaneous payments, the client who paid these incentives should provide the contractor with Form 1099-NEC.

• 1099-MISC. This form summarizes any monetary prizes, awards, or compensation the independent contractor received from the client while performing services. The client should provide this form if they paid over $600 in this category of payments to the independent contractor. 

Instructions for estimating Pennsylvania personal income taxes are located here. 

You must also submit Schedule SE (Form 1040 or 1040-SR) to determine the tax due on your net self-employment earnings. 

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How do independent contractors pay taxes in Pennsylvania?

As an independent contractor in Pennsylvania, you should be aware of the Pennsylvania Code governing estimated taxes [61 Pa. Code subsection 115.9(a)]. If you expect to earn more than $8,000 of taxable income during the year, you must make PA Estimated Tax installment payments. 

If you do not make the required estimated tax payments throughout the year, you must pay the full amount of tax due when you file your Pennsylvania personal tax return. You may also receive an underestimated payment penalty.

How much should contractors withhold for taxes in Pennsylvania?

Independent contractors in Pennsylvania can make estimated payments equivalent to their safe harbor amount. To calculate your safe harbor amount, multiply your last year's total income by this year's tax rate (currently 3.07%). 

To calculate the amount of your estimated tax payments, divide your safe harbor amount into four payments. This is the amount you should withhold and pay quarterly. You can also use Form REV-414(I) as a worksheet to calculate your estimated tax payment.

As an independent contractor, you must also withhold the standard federal self-employment taxes for Social Security and Medicare. The current self-employment tax rate is 15.3%, which consists of two parts:

• 12.4% for Social Security, including old-age, survivors, and disability insurance

• 2.9% for Medicare, including hospital insurance

Can an employer withhold taxes for an independent contractor in Pennsylvania?

Whether a company considers an individual an employee or an independent contractor depends on several factors, one of which is whether the company deducts taxes from the individual's pay. If the company does withhold taxes for the person, the person is more likely considered an employee in the eyes of Pennsylvania law. 

Therefore, a company or employer should not withhold taxes from an independent contractor's pay to avoid misclassification penalties, which we will discuss in greater depth later in this guide.

Can an employer be indemnified by an employee/independent contractor for taxes?

Because a company cannot withhold or deduct taxes on an independent contractor's behalf, the individual does not need to indemnify the employer.

Is VAT or sales tax relevant for independent contractors in Pennsylvania?

Whether you must register to collect and pay sales tax in Pennsylvania depends on your business activity. In general, any person or company selling taxable items or performing taxable services must register for the state's sales and use tax. 

The Pennsylvania Department of Revenue offers a helpful Retailer's information guide containing a great deal of detail about various retail taxes. The agency's website also offers helpful Sales and use tax taxability lists.

There are several types of sales tax licenses in Pennsylvania. 

Sales, use, and hotel occupancy retail tax license

Any business selling taxable items or performing taxable services should register for this license.

Promoter license

Pennsylvania requires this license for anyone who directly or indirectly rents, leases, operates, or grants permission to use space at a show for the display or sale of tangible, taxable personal property or taxable services.

Wholesale certificate

This license applies to companies that sell exclusively to retailers.

Transient vendor certificate

Any non-Pennsylvania enterprise, such as a sole proprietorship or a partnership, without a permanent physical business location in Pennsylvania, must register for this certificate if they sell tangible, taxable personal property or perform taxable services within the state.

Hotel occupancy tax – Booking agent license

When you rent a property or a part thereof to provide accommodations to a guest for fewer than 30 days, you must register for this license. You can find more information on this topic on the Pennsylvania Department of Revenue's page entitled Hotel occupancy tax – Booking agents.

How to file Pennsylvania self-employment taxes: step-by-step guide

Follow these steps to file your Pennsylvania self-employment taxes.

1. If you must collect and pay sales and use taxes in Pennsylvania, use myPATH's Pennsylvania Online Business Tax Registration service to register.

2. Using the tax forms you receive from your clients (1099-K, 1099-NEC, or 1099-MISC), report your earned income and incurred expenses on PA-40 Schedule C.

3. File your Pennsylvania personal income tax return electronically via myPATH. 

4. Estimate your Pennsylvania personal income tax using these instructions. You can make your quarterly personal income tax payments online, by phone, or by mail. 

Federally, you must also submit Schedule SE (Form 1040 or 1040-SR) to determine the tax due on your net self-employment earnings. More information about this form is available on the IRS website. 

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What is an independent contractor according to Pennsylvania law?

The state of Pennsylvania considers all workers employees by default. For the state to consider you an independent contractor, you must prove both of the following:

• While performing services for a company, you have been and will continue to be free from the company's control or direction over your performance of the services, and

• Regarding those services, you engage in an independently-established trade, profession, occupation, or business.

The Construction Workplace Misclassification Act imposes additional criteria for independent contractors engaged in the construction industry.

The dangers of contractor misclassification in Pennsylvania

Pennsylvania takes worker misclassification very seriously. In 2022, the state's Joint Task Force on misclassification of employees released a report estimating that 49,000 Pennsylvania businesses every year misclassify 259,000 workers, which costs the state tens of millions of tax dollars. Misclassification also deprives workers of basic protections like minimum wage, workers' compensation, overtime pay, and benefits. 

Worker misclassification can lead to financial and other penalties for employers who engage in this practice. Per the law commonly known as Act 72, an employer caught violating the act by misclassifying an employee as an independent contractor may receive civil penalties of up to $1,000 for the first violation and up to $2,500 for each subsequent offense.

Act 72 also stipulates that the Secretary of Labor may impose a stop-work order requiring improperly-classified workers to cease working for the violating employer. This can negatively impact your business by interfering with your revenue stream. It is highly important to ensure your correct classification from the start. 

Remote offers handy guides on the following topics:

• Employee and independent contractor misclassification: Expert guide

• The consequences of misclassifying employees as contractors

How do I ask the company I'm working with to convert me to an employee?

While many workers prefer the freedom and flexibility of working as independent contractors, at some point, you may wish to enjoy the advantages of becoming an employee. Some of these advantages can include:

• Protections such as minimum wage, unemployment insurance, workers' compensation, and overtime pay

• Benefits the employer only offers to full-time employees, such as health insurance, retirement benefits, and more

• Vacation time, sick time, and other types of leave

If you would like to convert from an independent contractor to an employee, a good place to start is to approach the employer's HR representatives or management to determine if the option is feasible. If so, they will guide you on the next steps to take. 

For an independent contractor wishing to work remotely for a company located in another country, Remote offers reliable employer of record services. Check out our Reimagine Remote Toolkit for expert tips on how to thrive in a remote workforce. 

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How do I get paid as an independent contractor in Pennsylvania?

There are several options from which to choose when considering how you will receive payment as an independent contractor in Pennsylvania. Some of the commonly used payment methods include:

• Cash

• Paper checks

• ACH transactions/electronic checks

• Debit and credit cards

• PayPal

• Other funds transfer programs like Venmo, Cash App, or Zelle

For independent contractors, Remote's contractor management services make creating invoices and managing payments a breeze. For employers, contractor management also makes it easy to onboard, pay, and manage contractors. 

The five-step Remote contracting process is simple:

1. Onboard as a contractor. The client will invite you to the Remote platform, where you will complete the onboarding process.

2. Sign your contract. You can upload your own contracts or use one of Remote's localized, compliant agreements.

3. Submit your invoice. Upload your payment requests straight through the Remote platform.

4. Receive client approval. The Remote platform makes it simple for the client to approve and pay multiple contractors at once.

5. Get paid. You receive your payment in your local currency. 

The best way to get paid as a contractor

Remote for Contractors takes the headache out of receiving payment from your clients. The platform allows you to:

• Submit invoices

• Log expenses

• Receive payments

• Create recurring invoices

• Sign contracts

• Manage documentation

There are five main reasons to choose Remote for Contractors:

• Send and receive payments in over 170 countries 

• Access localized, compliant in-app contracts and advice

• Set up automated invoicing

• Access health insurance for contractors

• Manage your self-employment taxes.

Becoming an independent contractor in Pennsylvania is easy with Remote

Becoming an independent contractor in Pennsylvania offers the potential for personal and professional fulfilment. The prospect of shaping your work according to your terms while providing clients with cost-effective solutions can be immensely rewarding. 

While the complexities of taxes and legal considerations might appear daunting, this comprehensive guide should provide insight into managing your Pennsylvania state tax obligations as a freelancer. By following the step-by-step instructions provided above , you can confidently fulfill your tax obligations, ensuring legal compliance while focusing on the growth and success of your independent contracting business. 

Remote's contractor management services for employers simplify onboarding, paying, and managing local and international contractors. Remote also enables independent contractors to sign localized, compliant contracts, submit invoices, and receive payment in their local currency, all from one robust yet simple dashboard. 

For more information about independent contractor management and payroll solutions, visit Remote's contractor management services page. 

Get started with Remote today.

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