It’s time to file taxes, and there are special advantages and special requirements if you’re an independent contractor (IC). An IC is a small business by definition, and as a small business enjoys tax breaks in the form of deductions for expenses employees do not.
Deducting business expenses before you pay taxes ICs are entitled to most of the same deductions larger businesses take for necessary business expenses. These expenses are deducted up front from your revenue (gross income) to reduce your taxable income. A few examples are:
- Business travel (not reimbursed by your clients)
- Cost of equipment
- Cost of supplies
- Cost of rent for office space
- Advertising and marketing
- Some types of entertainment for clients or prospective clients to gain new business
- If you have employees their wages are expensed 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
Most ICs carry their own liability insurance to protect themselves and their clients against errors. The cost of this insurance is also a tax deduction.
Did you lose money after paying these expenses? Although not a bright prospect, a bona fide business is subject to the risk of loss. It is possible for an IC to actually lose money. If so, these losses can be deducted against your income to reduce or eliminate any taxes due. If the losses exceed income for the year, some of the year’s losses may be carried over to the next year.
An IC also has some added responsibilities As a self-employed individual you are required to file and pay quarterly estimated tax deposits. This is an area that some small businesses, both sole proprietorships and corporations, fail to do — at least initially. Failure to pay quarterly estimated taxes can result in costly penalties and expose you to some hard collection procedures by the IRS.
Most people consider quarterly estimated tax deposits a complicated area because they are not familiar with the requirements. The estimated deposits may include:
- Your estimated income taxes and self employment taxes (Social Security and Medicare)
- If you had employees it also includes the employee’s share of FICA, Medicare and personal income taxes withheld
- If you are operating with employees in California, there is employee withholding of State Disability Insurance
As an employer you also pay an employer’s share of Social Security, Medicare and unemployment insurance taxes There’s more… The list of advantages and responsibilities of having your own business is much more than what is covered here. Being an employee is relatively simple. Show up, do the job, and get paid. An 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. Many leave meeting these requirements to a CPA, whose cost of service is also a tax deduction.
Good luck with your taxes this year!
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.