Tax Laws Regarding Independent Contractors
Independent contractors such as freelancers and sole proprietors find their own employment without having a typical boss. While independent contractors have a lot of freedom to run their business as they see fit including what clients they accept, they are also responsible for filing their own taxes and operate as a business when it comes to deductions.
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Self-Employment Taxes
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When you are an independent contractor, the IRS classifies you as self-employed, making you subject to self-employment taxes. Since you do not have an employer that takes Social Security and Medicare taxes out of your paycheck, you are responsible for doing it. An independent contractor must file a Schedule SE (Form 1040) to make estimated tax payments. The IRS claims a 13.3 percent self-employment tax on income -- 10.4 percent for Social Security and 2.9 percent for Medicare. The good news is half of the self-employment tax may be deducted to calculate the adjusted gross income come time for your tax return.
Home Office Deduction
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If an independent contractor uses a specific space in his or her home to conduct business, that space is tax deductible. The square footage of the home office is calculated to the percentage of space in the home. For example, a 10- by 12-foot spare bedroom used exclusively and regularly as a home office constitutes 8 percent of a 1,500 square foot apartment. This means 8 percent of the annual rent or mortgage may be deducted on the independent contractor's tax return as a business expense. If the person pays $1,200 a month, $1,152 may be deducted (8 percent of 12 times $1,200).
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Business Deductions
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Utilities, phones and vehicles used for business may be deducted as business expenses as well for independent contractors. In fact, independent contractors get to deduct many of the same expenses as partnerships and corporations. This is true even of items of mixed use such as a vehicle used for both personal and business affairs, though it changes how deductions are calculated. For the vehicle example, real costs such as oil changes and gas are harder to account for in mixed-use vehicles, so a log should be kept of business-related mileage for a standard per-mile deduction.
Quarterly Filing
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As an independent contractor, estimated self-employment tax must be paid quarterly. This tax is typically due on the 15th of April, June, September and January after the tax year ends. Some independent contractors opt to use a different fiscal year, which requires special filing through the IRS, making their taxes due on the 15th of the fourth, sixth, ninth and first month after their tax year ends.
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