When you work as an independent contractor, it often seems that you are paying an amazingly high amount of taxes when you finally file the paperwork. Although part of that number is related to the fact that an employer is not withholding money from your paycheck for taxes, you will pay a slightly higher amount than an employee in a company who makes the same amount of money.
Why Taxes are Higher
Independent contractor taxes are higher than the average employee with the same wage because the contractor is responsible for the full amount of social security taxes and similar taxes. An employer in a company will usually pay half of the social security tax for any employees, but will not pay for independent contractors.
That means that technically, you will have a higher base tax rate than the average employee in a company. Although independence will require you to pay a slightly higher tax rate, you also have the benefit of write-offs that can help bring down your rates.
Writing off any expenses from taxes is a benefit that independent contractors can use to help bring down tax rates based on money that is put into the work. For example, buying a vehicle for business travel that is not used for personal reasons can provide a tax write-off for the contractor because it is solely for business purposes. A vehicle that is used for both business and personal use can be written off, but only based on the percentage of the mileage that is used for work.
Appropriate write-offs for an independent contractor include:
- Any necessary business expenses, such as renting an office space or tools that are required for the work
- Office supplies that are used on the job
- Gas mileage or gas expenses related to business travel
- Entertainment expenses that are directly related to the business
Although many expenses can fall under the tax deductions, certain items are deducted using the general depreciation system allowed by the IRS and only about 50 percent of entertainment costs can qualify.
Inappropriate Expenses on Taxes
While you can deduct expenses that are directly related to your work, you will need documentation of every expense and items that are not related to your work do not qualify for the deductions.
Even if your office is out of your home, expenses like your television, fridge and kitchen appliances are not usually appropriate to deduct from your taxes.
Independent contractor taxes can seem complicated, particularly if you are just starting out and have not yet filed taxes in the past. Fortunately, you can get help with Advanced Tax Solutions. Well help you avoid complications.