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.
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More Questions
What can contractors deduct on taxes?
Contractors can deduct vehicle expenses, tools and equipment, insurance, licensing fees, home office costs, subcontractor payments, and business-related travel and meals.
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 answerWhat is the most overlooked tax break?
Retirement plan contributions. Most self-employed people either don't have a plan set up or contribute far less than allowed. The tax savings can be substantial and the money stays with you.
Read answerWhy do contractors struggle with cash flow?
Construction cash flow problems happen because you buy materials and pay crews before customers pay you. The timing gap between spending money and collecting it creates constant cash pressure.
Read answerHow to write a change order for construction?
A change order needs a clear description of the work, itemized cost breakdown, timeline impact, and signatures from both parties. Get it signed before the extra work starts, not after.
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