IRS policies involving independent contractors, or freelancers, are often complicated, even to experienced tax professionals, but especially to individuals who are self-employed and dealing with W-2’s from multiple sources. There are many fields of work that require independent contracts, including plumbers, dentists, doctors, veterinarians, accountants, graphic designers, etc. The IRS deems an independent contractor as a person who provides services to other businesses on a contract to contract basis. Those earnings are subject to Self-Employment Tax.
Self-employment taxes cover Social Security and Medicare taxes, which become more complicated in freelancing situations. In a typical work environment, both employee and employer pitch in for these taxes throughout the year. For an independent contractor, that means a larger sum of money goes towards those expenses. The Social Security tax rate in 2011 is 4.2% for employees and 6.2% for employers, driving the total percentage to 10.4% of annual income for independent contractors. Add that to a 2.9% rate for Medicare and independent contractors pay 13.3% total in taxes just to cover those two programs. In addition, freelancers are responsible for income taxes and self-employment taxes on a state and local level.
When trying to figure out how to deduct expenses, there are three basic expenses you should document throughout the year. The first is travel. Vehicular expenses are deducted under the federal compulsory mileage rate, this can also include rental fees for cars or trucks. You can also deduct meal expenses or hotel rooms. These deductions are valid as long as the freelancer does not receive compensation. The next form of deduction is operation costs, such as tools or equipment that are necessary for business. Phones, faxes, internet bills, clothing needed for jobs and licensing fees all fall into this category. Finally, if you have professional costs, such as trade publication subscriptions, organization memberships or dues to pay for a union, or any other type of cost that comes with “remaining in the game” for your career, these are all covered.
If an independent contractor files IRS Form 1040 Schedule C, they may also qualify for the Earned Income Tax Credit. They may also qualify for the self-employment health insurance tax deduction, which can be determined by filling out IRS Form 1040 Schedule SE.