Blog

10 Independent Contractor Tax Advantages

A recent report by Intuit, the software developer, says that by 2020, as many as 40 percent of American workers will be independent contractors. The trend toward independent work is being spurred on by a number of factors. For example, many Americans are shunning “traditional” employee-employer relationships for the relative freedom associated with “being your own boss.” This article will discuss the most important independent contractor tax advantages available to taxpayers.

Tax Incentives Associated with Independent Status

While each independent contractor’s situation is somewhat unique, there are some generalized tax advantages associated with independent contractor status. Here are ten to think about.

•  Home office deductions – For an office in your home to be considered a qualified deduction, it must be used solely for business. That means it cannot also be the guest room for out of town guests or the room where the family watches television. Properly segregated and documented, this allows for the deduction of a portion of the taxpayer’s housing expenses. If the self-employed business requires outside space, normal rules apply regarding the deductibility of reasonable business expenses.
•  No withholding from your revenues – Independent contractors have no tax withholding deducted from the income they generate. While contractors are still subject to federal income taxes, including the federal self-employment tax, they generally receive the full contract amount for services and/or goods sold. Many experts also say independent contractors usually command somewhat higher compensation for their work, since the firms with whom they are contracting do not have to bear the costs of employing them.
•  Travel expenses – While travel expenses must be reasonable in order to be deducted by the independent contractor, many contractors find that they can extend business trips to include some vacation time and save money in the process. Bear in mind that travel expenses for family members are generally not deductible.
•  Dependent Care Accounts – An independent contractor may establish special dependent care accounts to help with child care expenses. While the rules are somewhat technical, the net tax savings associated with such accounts can often exceed the tax benefits allowed to taxpayers who are not self-employed.
•  Retirement accounts– Special employer-sponsored retirement accounts (e.g., 401K and Simplified Employee Pension) can be established by an independent contractor. These deferred income accounts allow for greater contributions (and, therefore, larger deductions) than those allowed for individual taxpayers through normal IRA accounts. Such retirement plans can provide current deductions and long-term investment growth. For additional information, check out this online brochure published by the IRS.
•  Medical care plans – Somewhat like the rules regarding special retirement accounts, medical care accounts can be established by an independent contractor that allow the deduction of health care premiums and some related expenses.
•  Business entertainment– Subject to IRS rules regarding reasonableness, a portion of your business-related entertainment costs may be deducted from your income as an independent contractor. The IRS has determined that this is a commonly abused deduction, so keep careful records when it comes to entertainment or travel-related expenses.
•  Other related business expenses – Many employees incur expenses related to their work. IRS rules severely limit their ability to deduct such expenses, however. An independent contractor may deduct all reasonable and necessary business expenses incurred during income-generating activity.
•  Hire the kids – Independent contractors, with proper documentation and appropriate tax withholding, may be able to hire their children to do data entry, clean up around the office, and perform other ordinary business-related activities for wages. Those wages can be deductible to the independent contractor and generally taxed at the lower rates for part-time workers. Depending upon the age of the child, his or her income may be exempt from Social Security tax.
•  IRA accounts for employed children – While you’re employing the kids, set up an IRA (or Roth IRA) for them. Over time, this could develop into a real nest egg for later in their lives.

Proper Tax Planning is Key to Maximizing Independent Contractor Tax Advantages

Where there are significant benefits to independent contractor status, there are also some burdens. As noted above, careful record-keeping is a must. In order to take full advantage of the different independent contractor tax advantages available, many independent contractors decide to consult with an experienced tax attorney as they seek to maneuver through the maze of regulations that can crop up at every twist and turn.

Mackay, Caswell & Callahan P.C. – Experienced New York Tax Attorneys

Have you recently decided to become an independent contractor? Do you have questions about independent contractor tax advantages available to you as you set up your business? Are you concerned with your potential tax liability? If so, contact one of the Upstate New York tax attorneys or New York City tax attorneys at Mackay, Caswell & Callahan P.C. today. We have more than 30 years’ experience assisting taxpayers with all sorts of tax-related issues, including those related to self-employed individuals and independent contractors. With offices in Albany, New York City, Rochester, Syracuse, Utica, and Watertown, we have an office near by that can help you. So don’t delay – our New York tax attorneys are ready to help you with your tax-related issues today. Contact us online now.