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For the self-employed, calculating taxes is complicated. From wages to side jobs to tips, filing independent contractor taxes requires a thorough understanding of the IRS’ rules and regulations.
What is an Independent Contractor? Do you Qualify as one?
Independent contractors are sole proprietors of a business or a member of a partnership. They may either work full or part-time.
Independent contractors are considered to be self-employed. As a result, they are required to comply with Federal self-employment tax rules.
Independent contractors who make $400 a year or more must pay taxes on their income.
Independent Contractor Taxes for Dummies
Understanding the tax process helps the self-employed receive the largest tax return possible.
What Income is Taxable?
Any income received for work performed throughout the calendar year is taxable. This rule applies to employees and subcontractors, too.
Taxable income includes:
- Wages
- Side jobs
- Cash or check payments
- Tips
- Bartering
- Delayed payments
The Self-Employment Tax
Independent contractors must pay the self-employment tax to compensate the Federal government for not paying Social Security and Medicare taxes all year long.
Common Deductions
1. Self-Employment
According to the IRS, an independent can “deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.”
2. Transportation
Some transportation costs are tax-deductible for independent contractors, including:
- Trips between job sites
- Business-related trips
However, the commute between their home and their job site is not tax-deductible.
3. The Cost of Doing Business
Business activities that are necessary to sustain your company may also be deducted, such as:
- Advertising
- Business insurance
- Supplies and equipment
- Contract labor
4. Health Insurance
Independent contractors may deduct the costs of their personal health insurance premiums, if:
- Their business makes a profit.
- They were not eligible to enroll in their spouse’s plan or an employer’s health plan.
5. Wages
Eligible wage deductions for independent contractor taxes include:
- Salaries
- Commissions
- Business
However, this deduction does not apply to the wages independent contractors pay themselves.
While independent contractor taxes can be tricky, tax time is less intimidating for those who thoroughly document their income and expenses all year round.
