What taxes do you have to pay as a contractor?
Self-employment tax and income tax are the big ones. If you have employees, add payroll taxes. And depending on the type of work you do in Arizona, you may owe Transaction Privilege Tax.
Self-employment tax catches new contractors off guard more than anything else. Employees only pay half of Social Security and Medicare taxes because their employer covers the other half. When you’re a contractor, you pay both halves. That’s 15.3% on your net self-employment income. The Social Security portion of 12.4% applies up to about $168,600 in 2024. Medicare at 2.9% has no cap. If your net income exceeds $200,000 as a single filer or $250,000 married filing jointly, you also pay an additional 0.9% Medicare tax.
Federal income tax is separate from self-employment tax. Your net profit from contracting gets added to any other income you have, and you pay based on your tax bracket. This could be anywhere from 10% to 37% depending on total income. Arizona has a flat income tax rate of 2.5% that applies to your contracting income as well.
Because you don’t have an employer withholding taxes from each paycheck, you’re required to make quarterly estimated tax payments to the IRS and Arizona Department of Revenue. The due dates are April 15, June 15, September 15, and January 15. Miss these and you’ll face underpayment penalties even if you pay everything owed when you file your return.
Transaction Privilege Tax is Arizona’s version of sales tax, and it works differently for contractors. If you’re a prime contractor doing construction work, you generally owe TPT on the total contract price. Subcontractors are usually exempt but need proper documentation. The rules depend on the type of work, whether it’s residential versus commercial, new construction versus repairs. Getting this wrong means back taxes and penalties.
If you hire employees, you’ll also pay employer Social Security and Medicare at 7.65%, federal unemployment tax, Arizona unemployment insurance, and workers’ compensation insurance.
Most contractors should set aside 25% to 30% of their net income for taxes. Some need more depending on their bracket. A Queen Creek bookkeeper who understands construction can help you estimate what you’ll actually owe so you’re not scrambling at tax time.
The Valley's Trusted Accounting Firm
The Next Step:
A 15-Minute Call
Tell us what you're dealing with. We'll listen, ask a few questions, and then give you a simple price to do the work for you.
More Questions
How much tax do independent contractors pay in Arizona?
Independent contractors in Arizona typically pay 25% to 35% of net income in total taxes. This includes 15.3% self-employment tax, federal income tax based on your bracket, and Arizona's flat 2.5% state tax.
Read answerWhat expenses are 100% deductible?
Most ordinary and necessary business expenses are 100% deductible. The confusion usually comes from specific exceptions like meals at 50%, entertainment at 0%, and vehicle or home office expenses based on business use percentage.
Read answerHow do IRS payment plans work?
An IRS payment plan lets you pay off tax debt over time instead of all at once. Options range from short-term arrangements to multi-year installment agreements, each with different fees, interest, and requirements.
Read answerDo contractors charge tax in Arizona?
Prime contractors in Arizona pay Transaction Privilege Tax on their gross receipts from construction contracts. This is typically built into the contract price rather than shown as a separate line item to customers.
Read answerWhat are common tax mistakes small businesses make?
The most costly mistakes include mixing personal and business expenses, missing quarterly estimated payments, and misclassifying workers. Most are avoidable with proper tracking and year-round planning.
Read answerHow should I keep books for my construction company?
Keep books for a construction company by setting up job costing in your accounting software, coding every expense to a project, and reconciling accounts monthly. But most contractors need professional help to do this correctly.
Read answer
