Tax Advice for Independent Contractors

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    Self-Employment Tax

    • Self-employment (SE) tax is a tax that pays into the Social Security and Medicare programs for people who are self-employed, similar to FICA tax withheld from employees' paychecks. Calculate your SE tax due yearly on your 1040 tax return form. You can deduct 1/2 of the SE tax you pay when calculating your adjusted gross income. For the tax year 2008, the rate of SE tax is 15.3 percent on the first $102,000 of your net earnings.

      Since an employer does not withhold taxes from your paycheck if you are an independent contractor, you are responsible for paying your estimated taxes four times per year. If you don't pay your estimated taxes quarterly, you may owe a penalty when you file your tax return for the year. You can use the Electronic Federal Tax Payment System on the IRS website to pay your estimated taxes each quarter.

    Tax Deductions

    • When you are self-employed, you calculate your income using a Schedule C. The Schedule C allows you to deduct your business expenses and adjusts your total income to reflect those expenses. You only pay tax on your adjusted gross income, or your income after the adjustments made on the Schedule C form.

      Keep detailed records of your business expenses, all the items you purchase in order to perform your business as an independent contractor. If you purchase supplies, keep your receipts or a record of those transactions. If you use your home as your office, you may be able to deduct a part of your home expenses.

      You will need to determine which accounting method you use to account for your income and expenses in your business. Most individuals who do not hold inventory use the cash method, where all money you receive during the year comprises your income. The accrual method calculates the income and expenses in the tax year they were incurred, whether or not they were actually paid then, since sometimes a customer will purchase an item in December and not pay until January. The item would be accounted for in December of the previous year using the accrual method.

    Consider a Tax Preparer

    • Since being an independent contractor can complicate tax situations, you may wish to hire a tax preparer to help maximize your deductions. A tax preparer can also help you meet deadlines and avoid penalties from not paying your taxes properly. If you choose to prepare your taxes yourself, purchase a tax software program to help, or download tools directly from the IRS website (www.irs.gov).

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