Independent contractor taxes in Texas: freelancer tax management guide

With the landscapes of the Texas Hill Country and Big Bend National Park on your doorstep, it’s a shame to be trapped in a cubicle from 9 to 5. Whether you want to hunker down at one of Texas’ famous Tex-Mex spots or head off to a quiet cattle ranch to work, becoming a freelancer in Texas will open up a new world of flexibility and freedom. 

However, along with the perks of freelancing come some less glamorous challenges. One of the biggest is managing independent contractor taxes in Texas. In addition to the stress of finding a stream of new clients, you now have to put money aside for taxes, track your earnings, and file your own tax returns. 

While the world of freelancer taxes can be confusing, don’t let it put you off starting a new professional chapter. Once you understand how it all works and set up the right systems, it will become an in-built part of your daily routine.

So, let’s read on to gain total clarity around freelancer taxes in Texas and the most stress-free ways to manage them as an independent contractor. 

How do independent contractor taxes work in Texas?

So how different are independent contractor taxes in Texas from being taxed as an employee?

As soon as you earn over $400 from your freelance business, you must begin paying taxes to the IRS (Internal Revenue Service). In Texas, independent contractors pay a federal self-employment tax of 15.3% on annual income, which accounts for Medicare and Social Security contributions. This tax is the full responsibility of the contractor, rather than in traditional employment when the employer partially covers Social Security payments. 

All freelancers must also pay federal income taxes, a progressive tax ranging from 12% to 37%. There is no state income tax in Texas. Nor does the US have a VAT or value-added tax system in place. However, if you sell services that fall under the taxable category in Texas, you must charge clients a sales tax of 6.25%. Some areas may also impose a sales and use tax, which is an additional tax of up to 2%.

As an independent contractor, remember to save money from each paycheck to account for taxes. Freelancers must make tax payments to the IRS and file a yearly tax return using Form 1040 or 1040-SR. To keep a record of earnings, contractors should file a W-9 form with employers for whom they’ve carried out work. The employer then reports any earnings over $600 to the IRS using a 1099-NEC form. Keep copies of your 1099 forms, as these help define your status as a freelancer. 

If you are eligible to charge the Texas sales tax, you may need to apply for a sales tax permit and report and pay online. 

How do independent contractors pay taxes in Texas?

If you reside in Texas as an independent contractor, here’s what you need to know about paying your taxes.

Withholding taxes

Employers have no obligation to withhold taxation for independent contractors in the way they do for employees. Contractors cannot indemnify them for tax unless they add an indemnity clause to the contract. Therefore, you will need to track earnings, calculate any taxes owed, and make payments yourself. Withholding taxes can be tricky at first for freelancers, but putting aside a flat rate of between 25% and 30% of each paycheck is recommended to cover taxation.

Quarterly tax payments 

To break up payments, the IRS requires Texas independent contractors to make estimated tax payments each quarter using form 1040-SR. The deadlines for IRS tax payments fall on April 15, June 15, September 15, and January 15 each year. If one of these days falls on a weekend, the due date gets pushed to the next business day.

Tax deductions 

While freelancers often pay more taxes than employees, a huge positive is getting to write off many expenses. Many independent contractors don’t maximize on this due to not knowing all they can deduct. 

Common deductions include:

• Any costs related to a home office

• Vehicle use

• Travel and business mileage 

• Internet bill

• Phone bill

• Medical insurance costs 

• Advertising 

• Educational expenses

• Other business-related expenses.

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How to file Texas self-employment taxes: a step-by-step guide

Now comes the complicated task of correctly and compliantly filing your taxes as a Texas freelancer.

1. Apply for a social security number. Freelancers need an SSN to file tax returns. If you don’t already have one, apply using the SS-5 form. If you are not eligible for an SSN, you can apply for an individual taxpayer identification number (ITIN) using the W-7 form.

2. Calculate any taxes you owe. Calculate your estimated quarterly payments using form 1040-ES. You will need your previous year’s tax return to fill out the form and make income predictions, or if it is your first year of business, you will need to estimate your yearly earnings.

3. Make quarterly payments. Make payments to the IRS through the EFTPS electronic payment system or mail your payments to the address on the form.  

4. File your annual tax return. File your tax return online with the IRS using Schedule C.

As Texas charges no state income tax, you will not need to file a state income tax return.

What is an independent contractor according to Texas law?

Under Texas law, an individual's working conditions define whether they are considered independent contractors or employees. 

The Texas Unemployment Compensation Act (TUCA) defines employment based on factors such as service, receiving wages, and employer control over the manner and means by which an individual works. A worker is, therefore, typically considered an employee unless they can demonstrate otherwise. Independent contractors typically have control over their work, assume risks, and are responsible for their own taxes and benefits.

Independent contractors have a few options regarding how they register in Texas.

Sole proprietorship

Registering as a sole proprietor is the most straightforward option to become an independent contractor. This allows providers to get started straight away by offering services for money. A sole proprietor is legally considered the same entity as their business and works under their own name rather than a business name. The downside of this is that they assume all the risk and liability. 

Partnership

Similar to a sole proprietorship, partnerships include two or more partners that provide business services. In this case, all partners share profits and split the liability equally.

Limited Liability Company (LLC)

Independent contractors may also choose to provide services through a limited liability company. A single-member LLC — while being its own legal entity — works similarly to a sole proprietorship for tax purposes. While an LLC with multiple members does not pay taxes on business income, it must report taxes to the IRS via Form 1065.

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The dangers of contractor misclassification in Texas

As employment relationships are nuanced, it is not always clear when a worker’s relationship with their employer is that of an employee or contractor. However, as both carry different legal implications, businesses must classify workers correctly. 

In Texas, it is an employer’s responsibility to correctly classify a worker. Regardless of whether they report their wages with a 1099 form, it is the nature of the relationship that defines contractor status. Misclassifying workers can trigger serious consequences for employers, including fines of $200 per worker, backpay of taxes and interests, or legal risks.

Misclassified workers miss out on important working rights, statutory benefits, and legal protection. Contractors are typically liable, so they may face unnecessary legal and financial risks.

While some employers may purposefully misclassify workers to avoid paying tax contributions and benefits, others may not be aware of their mistake. Both parties need to monitor working relationships and how they evolve to avoid the risks of misclassification.

If you suspect you might be misclassified, you could be missing out on relevant worker rights and benefits. Approach your employer to request a conversion from a contractor to an employee. Remote’s employee and independent contractor misclassification guide has more insights and advice on handling employer situations as a contractor.

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

Bringing up legalities with your employer can seem intimidating. But a casual conversation might be all it takes to claim and receive your worker rights and entitlements. 

First, ensure you fully understand the legal differences between contractors and employees. If you notice that you have taken on more duties, your employer controls how you carry out work, or you are no longer compliant with laws, it might be time to convert from a contractor to an employee. Provide evidence of your working relationship as well as knowledge of the legal and financial risks for yourself and your employer to facilitate the conversation.

Your employer might be worried about assuming the additional risks and costs associated with hiring employees, especially if you reside in another country. In general, to hire employees abroad, you must open a legal entity in that country, which can be extremely expensive and time-consuming. 

However, it’s possible to hire remote employees without an entity by using an employer of record (EOR) service like Remote. Hiring international employees does not have to be much more difficult and costly than hiring global contractors.

Once your employer understands that hiring you as an employee can be simple and cost-effective and help them stay compliant, converting you will be a no-brainer. Check out Remote’s remote worker tool kit for more helpful tips and advice on handling freelancer issues.

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

Navigating payments is an important part of managing independent contractor taxes in Texas. You have free reign as a freelancer to choose how you get paid. But it is important to understand the pros and cons of different options to ensure you get paid easily, on time, and avoid as many fees as possible. 

Bank transfer 

Similarly to employees, many businesses pay independent contractors directly into their bank accounts. With employers in the US and Texas, direct bank transfers or wire transfers are generally speedy, secure, and cost-effective. International payments may incur hefty transfer fees, delays, and currency conversion commissions.

Online money transfer

For fast and easy worldwide payments, payment platforms like PayPal, Wise, and Stripe are straightforward to set up. You have the flexibility to accept bank transfers or credit card payments and usually receive funds instantly. While highly convenient, payment platforms usually take large commissions and fees, so you could lose money over time.

Contractor management platforms 

If you are looking for a solution to not only receive low-cost payments, but also manage payments, invoices, contracts, and taxes in one place, Remote's contractor management software could be the answer. Employers can make payments in multiple currencies without huge fees and conversion costs and centralize all contractor payments in one place. Contractors benefit from in-app, compliant contracts, invoices, and secure, timely payments. 

Remote users can:

1. Onboard contractors by an employer sending an invite.

2. Sign a contract from the library of compliant global contracts in the platform.

3. Submit an invoice directly on the platform.

4. Approve the invoice in minutes and create a payment request.

5. Pay the contractor into their account in local currency and automate payments.

Get started as an independent contractor in Texas with Remote

The most important aspects to remember to successfully manage independent contractor taxes in Texas are:

• Understanding your tax obligations and those of your employer 

• Allocating money for and paying all relevant taxes

• Setting up systems to manage invoices and payments

• Building positive and complaint relationships with employers

To make your life easier, check out Remote’s Freelancer Hub. Our simple and easy-to-use platform is the best way to manage everything — clients, contracts, invoices. Independent contractors can stay compliant, submit invoices, and receive payments in one place. 

Learn more about how Remote makes it simple for companies to hire international contractors ‌with our global contractor management and payroll services.

Get started today with Remote’s contractor management platform and discover how Remote can help you and your clients manage contractors easily!

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