Independent Contractor Compliance Blog

This article is for the IC Consultant.

One of the biggest advantages to being an IC over an employee is the tax breaks.  A small business gets to deduct expenses employees do not.  However, there are also responsibilities attached to the benefits.

Here are a few items to think about:

Business Deductions: If you are an IC then you are entitled to the same deductions larger businesses can take on all ordinary and necessary business expenses.  These expenses are deducted from your revenue to reduce your taxable income.

A few examples are:

• Business travel
• Cost of equipment
• Cost of supplies
• Cost of rent for office space
• Advertising
• Client or prospective client entertainment to gain new business
• If you have employees their wages are an expense against your income.
• The costs of fringe benefits for your employees such as health insurance.
• The taxes you pay on your employee’s wages such as:
  • The employer’s share of FICA and Medicare taxes.
  • Federal and state unemployment taxes.

A bonafide business is subject to the risk of loss.  It is possible you could actually lose money during the year.  These losses can be deducted against your income to reduce taxes. If the losses exceed income for the year, some of the year’s losses may be carried over to the next year.

Responsibilities

The self employed are required to file and pay quarterly estimated tax deposits. This is an area that many small businesses, sole proprietorships and corporations fail to do-at least initially, until the IRS catches up with them.  Failure to pay quarterly estimated taxes can add penalties and expose you to hard collection procedures by the IRS.  Some people consider this a complicated area of tax because they are not familiar with the requirements.  The rules are really fairly simple.

• A business generally should pay quarterly estimated taxes if the total tax bill at the end of the year will exceed $500.
• In addition by the end of the year, you should have made deposits of either
  • 90 percent of the tax that will be owed for the year, or
  • 100 percent of last year’s tax.

(There are formulas that are best left up to your CPA or account to compute estimated income tax deposits).

• If you had employees you were responsible to withhold the employee’s share of FICA, Medicare and personal income taxes (and Disability Insurance in California) from their wages and pay it to the government during the year.
• Do you need a special license to perform your profession? If so, is it up-to-date?
• Do you have liability insurance?
• If you are only providing a service you don’t need to be concerned about sales taxes-at least not at this time (there have been discussions in the state legislature about this possibility but the concept has not yet found life).

The list of advantages and responsibilities of having your own business is much more than what was covered here.  The point is being an employee is relatively simple.  Show up-do the job-get paid.  The IC, on the other hand, must be aware of, and follow, many other legal requirements.

You may need an expert to help you meet these requirements.