Two taxes on one income
When a US company hires a US independent contractor, a question comes up on both sides of the deal. The contractor asks what taxes they owe. The company asks whether it has to take anything out of the payment. The answers fit together: the contractor pays their own taxes, and the company does not withhold.
A US independent contractor pays two federal taxes on the same dollars of income. The first is ordinary federal income tax. The second is self-employment tax, which covers Social Security and Medicare. An employee splits those two payroll taxes with an employer and never has to think about them, because the employer withholds and remits. A contractor has no employer in that sense, so the contractor carries the full load and pays it directly.
This guide walks the verified mechanics with IRS citations attached, then explains why the hiring company stays out of the withholding entirely. One note before we start. This is general information, not tax or legal advice. Outcomes turn on the facts of a specific situation, so confirm the details with a qualified tax professional.
What the IRS says a contractor owes
The starting point is the IRS Self-Employed Individuals Tax Center. You are self-employed, in the IRS framing, if you “carry on a trade or business as a sole proprietor or an independent contractor” or are “otherwise in business for yourself.” That description covers the typical freelancer, consultant, or solo contractor a US company hires.
On the tax obligation, the same IRS page is direct:
“Self-employed individuals generally must pay self-employment (SE) tax as well as income tax.”
So it is two taxes, not one. Income tax is the familiar piece. Self-employment tax is the piece that surprises first-time contractors, because it replaces the payroll taxes an employer would otherwise handle. The IRS adds that “SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves.”
There is a floor before SE tax kicks in. The IRS states you “have to file an income tax return if your net earnings from self-employment were $400 or more.” Above that, the self-employment tax applies.
The self-employment tax rate, broken down
The headline number is 15.3 percent, and it is not arbitrary. The IRS Self-Employment Tax page breaks the rate into its two parts:
“The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).”
Add 12.4 and 2.9 and you get 15.3 percent. The two parts do not behave the same way, though, and the difference matters once income climbs.
The 12.4 percent Social Security part has a ceiling. It applies only up to the annual Social Security wage base, a cap the Social Security Administration adjusts each year, so a contractor should check the current year’s figure. Once earnings pass that wage base, the Social Security portion stops accruing.
The 2.9 percent Medicare part has no ceiling. The same IRS page is explicit: “all of your wages and tips are subject to the 2.9% Medicare part of the SE tax on all your net earnings.” Every dollar of net earnings feels the Medicare slice, no matter how high the income goes.
| Component | Rate | Cap |
|---|---|---|
| Social Security | 12.4 percent | Applies up to the annual Social Security wage base, adjusted each year |
| Medicare | 2.9 percent | No cap, applies to all net earnings |
| Combined SE tax | 15.3 percent | The Social Security part stops at the wage base |
Self-employment tax is figured on Schedule SE, filed with Form 1040. That is on top of, not instead of, regular income tax.
Where the income gets reported: Schedule C
A contractor does not just declare a single income number. They report the business itself. The IRS Self-Employed Individuals Tax Center states:
“To file your annual income tax return, you will need to use Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), to report any income or loss from a business you operated.”
Schedule C is where revenue and deductible business expenses meet. The net profit that comes out the bottom is what feeds both the income tax calculation and the self-employment tax on Schedule SE. This is the structural reason a contractor can deduct legitimate business costs in a way an employee usually cannot: the contractor is running a business, and Schedule C is the form that captures it. Our glossary entry on Schedule C walks the form in more detail.
Why nothing is withheld: estimated taxes
Here is the part that trips up new contractors and confuses some hiring companies too. With no employer taking taxes out of each payment, the money has to reach the IRS some other way. That way is quarterly estimated payments.
The IRS Self-Employed Individuals Tax Center spells out the reason in one sentence:
“As a self-employed individual, estimated tax is the method used to pay Social Security, Medicare, and income taxes; this is because you do not have an employer withholding these taxes for you.”
That sentence is the whole logic of contractor taxation. No employer means no withholding, and no withholding means the contractor pays directly through estimated tax. The same page states that “as a self-employed individual, generally you are required to file an annual income tax return and pay estimated taxes quarterly.”
The IRS Estimated Taxes page fills in the threshold and the form. On who owes:
“Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”
On the form and timing, the IRS states that those individuals “generally use Form 1040-ES, to figure estimated tax,” and that “for estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date.” So a contractor who expects to owe 1,000 dollars or more sends four payments across the year using Form 1040-ES, covering income tax and self-employment tax together. Our estimated taxes glossary and self-employment tax glossary entries cover the mechanics if you want the short reference.
The company’s only job: a 1099-NEC
Now flip to the hiring company’s side. Because the contractor is not an employee, the company does not run payroll for them, does not withhold income tax, and does not withhold or match Social Security and Medicare. The company pays the invoice in full. Its tax responsibility is reporting, not withholding.
That reporting happens on Form 1099-NEC, Nonemployee Compensation. The IRS 1099-MISC and 1099-NEC instructions state the trigger:
“File Form 1099-NEC, Nonemployee Compensation, for each person in the course of your business to whom you have paid the following during the year. At least $600 in: Services performed by someone who is not your employee.”
So if a company pays a US contractor 600 dollars or more across the year for services, it files a 1099-NEC reporting the total. There is no withholding figure on that form for a standard US contractor, because nothing was withheld. The form simply tells the IRS what the contractor was paid, and the contractor reconciles it on their own return.
Worth noting from the same IRS instructions: payments to a corporation are generally exempt from 1099-NEC reporting, with specific exceptions such as attorney fees. A contractor operating as a sole proprietor or single-member LLC is the common case that gets the form.
| Party | Tax responsibility |
|---|---|
| US independent contractor | Pays federal income tax and 15.3 percent self-employment tax, files Schedule C and Schedule SE, sends quarterly Form 1040-ES estimates |
| US hiring company | No withholding. Files Form 1099-NEC reporting payments of 600 dollars or more for the year |
Why this split exists
The arrangement is not a loophole or a courtesy, it follows from the legal status of the relationship. Employment law and tax law treat an independent contractor as a separate business, not as part of the hiring company’s workforce. A business pays its own taxes. That single classification fact drives everything above: the self-employment tax that replaces the employer payroll-tax split, the Schedule C that reports the contractor’s own business, and the estimated payments that stand in for withholding.
It also explains why the company is exposed if it gets the classification wrong. If a worker is treated as a contractor but is really an employee under the rules, the company can become liable for the payroll taxes it never withheld. The clean version of this relationship depends on the worker genuinely being an independent contractor, which is a separate determination worth getting right before any payment goes out.
Foreign contractors are a different analysis
Everything above describes a US person doing work, the standard domestic contractor case. A foreign contractor working outside the US is governed by entirely different rules. Their pay is generally foreign-source income, they sign a Form W-8BEN rather than a W-9, and they are not issued a Form 1099-NEC at all. US self-employment tax does not reach them, and the source-of-income test, not the 1099 rule, decides the company’s reporting. If your contractor is abroad, do not apply the US framework on this page to them. Treat it as a separate question and confirm the source-of-income outcome first.
When a platform handles it for you
A US company paying one US contractor can run this on its own: collect a W-9, pay the invoice, file a 1099-NEC at year end. The complexity grows when contractors span states, entity types, and borders, because the right form, the right reporting, and the right classification stop being uniform.
Omnivoo Contract Management handles it for a flat 49 dollars per finalized contract. We collect the correct tax form, run the KYC, draft and manage the contract, and pay your contractors in 150+ countries, end to end. Transaction fees are passed through at cost, with no FX markup and no subscription.
Want the answer for your specific setup? See how Omnivoo Contract Management handles contractor payments and reporting end to end, or talk to our team.