Benefits

Tax Considerations for Independent Contractors
August 24, 2006

Filing Tax Returns

Federal Entity Status: Your entity status determines which return you are required to file.

• Sole proprietorships simply add a schedule C to their individual form 1040. Schedule C is used to summarize the income and expenses of your business. Along with schedule C, you may need to include other forms such as form 4562 to report depreciation and form 1040SE to report your self-employment tax.
• You may elect to be taxed as a corporation (form 8832), in which case you would need to file a separate form 1120 and related forms. There are some tax benefits to this option, although you would need to weight the additional administrative burden and costs against those benefits. In the short-term you are likely to be best served by operating as a sole proprietor.

State of NH: If your gross receipts from business activities exceeds $50,000, you are require to file a New Hampshire Business Profits Tax return. However, you would likely pay zero tax as you can claim your net profit as a compensation deduction. If your gross receipts exceed $150,000 or if you net profit exceeds $75,000, you are required to file a New Hampshire Business Enterprise Tax return. In this tax you would incur a tax of 0.75% of your net profit plus any interest expense.

Business Expenses

Operating as a subcontractor means that you are your own business. As a result, you will be entitled to claim certain business expenses that you would not have derived any benefit from as an employee. Some of the common business expenses are discussed below.

• Home Office: In order to claim home office expenses you must first qualify for the deduction. Thus, you must meet the following criteria.
  • The office must be used exclusively and regularly as a place of business to meet or deal with patients, clients, or customers in the normal course of business.
  • In order to qualify as being used exclusively, it must be a specific area of the home use only for trade or business. The area used for business can be a room or other separate identifiable space. The space does not need to be marked off by a permanent partition. However, the exclusive use requirement is not met if the space is used for both business and personal purposes.
  • In order to qualify as being used regularly, it must be used for business on a continuing basis. Thus only occasional or incidental use would not be sufficient to qualify.

  If you qualify for home office deduction, you can deduct a portion (based upon percentage of living area) your expenses for items such as insurance, depreciation, utilities, etc.

• Vehicle Expenses: Two options are available to claim the costs of operating you vehicle for business purposes. You can select either the standard mileage rate method or the actual expense method. For each vehicle you must stick with the method you select so you can't bounce back and forth each year. Below is an outline of the methods
  • Standard Mileage Rate - This is the easiest to track in that you determine the deduction by multiplying your business miles by the rate. For 2006 the rate is 44.5 cents per mile.
  • Actual Expenses - Under this method you would first determine the percentage of your vehicle use that is business related. Then you multiply this percentage by your actual expenses. Actual expenses include depreciation, interest on vehicle loan, repairs and maintenance, fuel, insurance, and registration.
• Other Expenses: Includes but are not limited to insurance, computer equipment, office supplies, telecommunications, postage, and professional fees.

Other Issues

Other items to consider include the payment of estimated taxes, taxpayer identification number, and retirement plans.

• Estimated Taxes: Since independent contractors are self-employed, they must make quarterly estimated tax deposits to cover both regular income tax and self-employment tax (this is your social security and Medicare tax). Assuming that your previous years withholdings were adequate, a good way to determine how much to deposit is to take the percentage of your withholdings to gross wages in prior years, add 15% (for self-employment tax) and multiply the total percentage by your estimated net profit for the quarter. For individuals, estimated tax payments are made by filing form 1040-ES and are due on the 15th of April, June, September, and January.
• Taxpayer ID Number: Unless you hire employees or are taxed as an entity other than a sole proprietor, you are not required to obtain a taxpayer identification number.
• Retirement Plans: If you would like to put away more than the $4,000 ($5,000 if 50 and older) allowed through an IRA contribution, you can establish a SEP-IRA or SIMPLE-IRA plan for your business.