Tax Time Tips for Independent Contractors

Tax time is a confusing, and sometimes frightening, time of year. If you've got one job, no kids, no house, and no deductions, then it's easy. For everyone else, it's crazy. This is especially true for Independent Contractors (ICs). Many people wonder if the qualify as and IC, if they have to report their income, and even what could happen if they don't report their income. This is especially important for Associated Content Producers because they are considered Independent Contractors and are responsible for their own taxes. This includes Federal, State, Self-Employment, and any other applicable taxes. What follows are some common questions and answers about being an IC and taxes.

What is an Independent Contractor?

According to the IRS:

The general rule is that an individual is an independent contractor if (the person for whom the services are performed) has the right to control or direct only the result of the work, and not what will be done and how it will be done or method of accomplishing the result. (http://www.irs.gov)

What that means is that if you set your own hours, you can negotiate a fee, and you can determine what work you will or won't do, then there is a good chance that you are an IC. At Associated Content, we set our own hours. While AC determines the offers for our work, we still have the option to decline, and we get to decide what we want to write about. AC can set standards for the content they will accept, but they can't tell us how to do it. AC Content Producers are Independent Contractors.

One easy way to tell if the company you're working with considers you an Independent Contractor is if they send you a W2 each year. If they do, then you're an employee.

What income gets reported to the IRS?

An individual company, such as Associated Content, must report payments totaling $600 or more in a calendar year to a single person or company. That means if you made $600 at AC last year, they were required to report it to the IRS. If you average $50 a month, they reported what they paid you. This is true for any company that you worked with as an Independent Contractor.

What income do I have to report to the IRS?

In contrast to the $600 reporting requirement that companies have, you as a self-employed Independent Contractor are required to report your earnings if you make over $400. That is $400 total for all self-employed activity. So let's suppose you made $150 at AC, $150 at another writing website, and $150 working for another online company. That's $450. None of those companies would have been required to report their payments to you, but you are required to report your income to the IRS.

What taxes do I have to pay as an Independent Contractor?

Federal, State and a special Self-Employment tax that is equivalent to Social Security and Medicare taxes that are deducted when you are an employee. A good rule of thumb is to take 20 to 25% of your earnings and set them aside for taxes.

How do I pay taxes as an Independent Contractor?

If you were an employee, your employer would deduct taxes from your paycheck. As an IC, you are responsible for paying your own taxes. You are required by the IRS to make quarterly estimated payments. Every three months, you need to figure what you've made, and pay the taxes on it. You can get more information at http://www.irs.gov You will also want to look into what taxes you have to pay your state.

If the company doesn't report my income, why should I?

Because you might get caught. And the penalties for tax evasion are rough. These include repayment with penalties and interest, garnishment of employment wages, and possible jail time. The IRS has their ways of finding out, it's better safe than sorry.

With all these tax and reporting requirements, is it even worth it?

Yes. Independent Contractors have special deductions that they can make, that employees can't. You can deduct home office expenses. The way to figure this can be a bit tricky, but it's usually a percentage of your household bills. If you buy a computer to work on, you can deduct that. Any expenses that are used exclusively for business are deductible. You also have more freedom. No 9 to 5 hours (unless you like that sort of thing), and no boss hanging over your shoulder watching your every move. You can choose whether you want to work on something or not.

Being an IC is a bit more complicated than being an employee, so it's worth it to go see a professional tax advisor to help with your tax preparation. They'll be able to help you maximize your deductions and keep from breaking the law.