Realities of being an Independent Contractor

1. You are taxed on your net income
A. You would be taxed at two levels, self-employment and your normal marginal tax rate. The net income of self-employment is taken on form 1040 se and then the employment taxes are assessed. The first 89k is taxed at 15.3% and then 2.9% thereafter. Half this tax is then subtracted from your federal income, the remainder is taxed at your normal federal and state rates.

2. Due to above its possible for a self-employed IC to pay as much as 50.3% in taxes. And the state gets an addtl 0-10% depending on the state.

An IC is essentially a business.

A. You are running a sole proprietorship. You must keep records and all normal rules of business apply. Deducting expenses is dependent on how good you keep records.

b. Insurance and registration is required.

c. Highly suggested to setup a seperate business bank account for the business, and run all income and expenses through it.

Mileage- This is the major expense of an IC. You must keep a log of biz vs personal mileage. The first and last trip of the day are considered personal unless you have a home office.

Meals/Entertainment- Only deductible if you are entertaining a client, keep details of purpose of the meal and participants, proof of payment.

Home Office- IRS does allow you to deduct expenses of home office. This advantage is small unless you rent. Your home office must be set aside solely for business.

Retirement- As a self-employed individual there is an advantage to setting up retirement plans. Your contributions are tax-deductible.

Health Insurance- This is deductible for self-employed individuals. Done on your 1040.

Keep records, this is critical!

You must pay taxes quarterly!

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