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4 Tips to Reduce the Tax Burden of Being an Independent Contractor

By Sean M. Hugo, CPA

As technology has evolved over the last decade, more and more people are working as independent contractors, also known as "1099 contractors" or "1099 employees." The benefits of setting one's own hours and working mobile are just a few of the benefits enjoyed by former employees turned independent contractors. However, when it comes to tax return preparation, independent contractors can run into some trouble.There are a few landmines out there in the tax code for independent contractors that workers - who were formerly employees and are now 1099 contractors - need to know about before they complete any independent contractor tax forms.

Understanding Employment Taxes

Independent Contractor Taxes - 4 Tips To Reduce Taxes for 1099 Contractors.pngAs an employee, when you received your paycheck your employer held back income tax, social security and medicare taxes. What you didn't see happen behind the scenes is your employer then matched the social security amount and medicare amount withheld from your check and sent that to the IRS.

As an independent contractor, you are now responsible for not only the income tax due, but also both sides of the social security and medicare taxes.

Listen carefully: the combined rate for social security and medicare is 15.4% and is figured on the earnings from your business activities and calculated before itemized deductions or personal exemptions. When you factor in the combined income tax and social security tax, medicare tax, and state income tax, the combined tax rate can hover around 50%.

Independent Contractor Taxes

Now that I have your attention, here are a few things that you can do to help reduce the tax burden of being an independent contractor.

  • Look into opening up a retirement account that you can contribute to on a before-tax basis. In many cases a SEP IRA will help allow for the most money to be put back for retirement each year, and will thus result in a large reduction in your tax burden.
  • Understand the rules regarding business miles. The IRS will allow you to deduct business miles as an independent contractor. However, the IRS will not allow a mileage deduction for commuting miles, so it is important to understand the difference.
  • Do you have teenage kids? Are they always asking for money? Of course they are. Why not hire them to do some filing or cleaning your office? You get a business deduction - which lowers your tax - and your child learns the value of a dollar. It is a win-win for everyone. It is important to keep a few things in mind: be sure to document the work that was performed, and it would be a good idea to have some type of timesheet showing the time spent on the tasks. Also the pay must be commesurate with the tasks performed.
  • Do you need to have a business meeting? Why not hold the meeting at your house instead of reserving a hotel meeting facility? The IRS will allow for a deduction for reasonable and necessary expenses. A business meeting would meet this criteria. Your business would pay you personally for the use of your residence, thus creating a tax deduction. The beautiful part of this is the IRS allows taxpayers to rent their personal residence for 14 days or less without picking up the income as taxable.
One of the key factors in managing your taxes as an independent contractor is to be proactive and not wait until the last minute. Give us a call today at our office and we can discuss some your business and help you identify all the deductions you may have been missing.