Working as an Independent Contractor can be a great solution for those that want the opportunities and freedom that being self employed brings. It can also bring along with it tax headaches and trouble that you are not ready for. An Independent Contractor is for all legal reason, self employed and responsible for all business expense and taxes. This includes Social Security and Medicare taxes which are paid through the self-employment tax. Regular employees have the benefit of their employer being responsible for a portion of these, but are not able to get the tax breaks that a Independent Contractor can.
The first things you must establish when signing a contract for employment are the terms. If you are being asked to work a specific schedule, with little freedom in hours, you are more than likely an employee. This can be shaky ground, especially in the world of telecommuting. Many employers or companies treat all of their home working staff as Independent Contractors when in fact they should be employees. This is where you must make the decision to agree to the Independent Contractor agreement or not.
As an employee, you will be required to work a specific schedule for an hourly wage. Most employers provide the equipment necessary to complete your job, and provide ongoing training. If you are setting your own schedule, and they make this mandatory, it is not the same as them stating the hours you may work. These differences are most realized during tax time. That is where you will notice the difference between your employee or Independent Contractor status. The tax breaks can be numerous, but if you are like many people, you do not want the responsibility of managing them.
Talking about tax breaks, if you are a Independent Contractor and work form your home office, there are many deductions that you can take. The main rule of thumb though is that anything you claim as an expense must be only used for work purposes. So, if your ten year old spends a few hours on the computer a week, it is no longer tax deductible. Now, back to what your home office can provide for you.
As you prepare your office space, keep in mind that anything in it can be used as a tax deduction. From the new wallpaper, to that chair you just had to have. As you go through the year, be sure to keep a large manila folder nearby. This will make it easier to keep track of your office expenses. The copy paper, ink cartridges and pens can add up over the year and you want your paper clip’s full of what you can get from it. All of these will be deducted from your income on your form SE. This is the Self Employment form, and you, or your accountant, will list not only your business income, but your expense as well. You can deduct a portion for the use of your home. This is based on the square footage that is used as office space. If your business or job entailed storage of inventory items, that square footage is also deductible.
So, as the Christmas lights begin to fade, start gathering up your envelopes that you have stored all year long and you will reap in the savings on your taxes. Once you’ve filed, place them in a safe place, back in their envelopes. You will want to keep these handy for the next several years. Be sure though that you are following the letter of the law. An audit is not what you want. It can be a stressful situation. If you happen to be audited, be sure to obtain the advice of your accountant. They will be able to help you through.