If a specific US taxpayer is an independent contractor, he is commonly seen asking how independent contractors should file taxes if he does not own any business. And most importantly, while the taxpayer file his taxes as an independent contractor, where should he list his expenses? The last by not the least what is the difference between a self-employed Individual and an independent contractor?
Who is an independent contractor?
A self-employed individual who typically owns his business and provides services to other business is known as an independent contractor. According to the regulations set by the Internal Revenue Service, an individual or the self-employed individual can only be the independent contractor if he harbors a direct authority on the outcomes of the work. The independent contractor, under the general rule proposed by the IRS should not have the control on how the work will be progressed.
So, by far, we know that the IRS perceives an independent contractor as a self-employed individual. In this respect, the income generated from the work of a self-employed individual or independent contractor is fall under the category of self-employment tax.
Tax filing procedure of an independent contractor
Even if you do not officially start your recognized business, you will still be treated as a sole proprietor as you are filing your taxes as an independent contractor. Bear in mind that as you are considered as a sole proprietor of the business, you are expected to file your taxes on the form Schedule C so that you can appropriately title your income and associated overheads.
The reason why an independent contractor needs to fill the form Schedule C is that he is considered as a self-employed individual by the IRS. This form is titled as Profit or Loss from Business that is sole proprietor must include your tax return of your income if the income is generated through self-employment means.
How the income of the self-employed individual gets affected if he files the taxes as an independent contractor?
As a self-employed individual, you will obviously get the payment for all the business related work that you do. But the payments will not be in the form of salaries or wages; they will be counted as business income. The business checking account is the place where all the money an independent contractor receives from his selling of products and services go to. Keep in mind that whatever amount you withdraw from the business checking account does not affect the taxes you are indebted to pay as all the income from every source is subjected to income tax.
As the independent is not an employee or workforce but the master of his own private business set-up, the income generated through the workings of his business operations are not subjected to any federal income tax withholding and hence there aren’t any kind of deductions from the healthcare or social security expense. As an independent contractor, through your business tax return, you are expected to pay federal and state income tax on all forms of business incomes.
The self-employment tax that is imposed on independent contractors include the social security and Medicare tax has to be paid in all circumstances in combination.
What expenses can the independent contractor deduct while filing for his annual tax return?
An independent contractor has the right to deduct the standard business expenses that they have remunerated. In order to deduct these typical business overheads, the independent contractor needs to observe an excellent book-keeping and records of the expenses from the time they were added and the amount they carry within them. Furthermore, to take numerous legalized deduction, you need to first prove that these expenses were business centered only.
In this respect, the IRS also affirms to the fact that those expenses that are directed for the business purpose can only be deducted. In addition, these expenses should be documented noticeably and categorized under clear cut columns of amount of the expense, the time at which they were carried and the purpose.
So, these are the few questions that a self-employed individual commonly ask as to how an independent contractor should file taxes. Keep in mind that the situation of each independent contractor may be different from another and consequently tax related issues arise. So, it is better they find a tax preparer or an accountant who would provide them financial guidance and help them to tackle with these issues.
