- The Internal Revenue Service uses a precise definition to determine whether you are an employee or qualify for independent contractor status. In general, if you determine your own working conditions, cover your own work-related expenses and are paid by by several clients according to specific assignments, rather than on a set schedule, you probably qualify as an independent contractor. However, the IRS may determine that an employer-employee relationship actually exists, even if the company calls you a contractor. If you're in doubt either you or the company in question may file Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding" with the IRS.
- As an independent contractor, making quarterly income tax payments may help you avoid a big tax bite and a possible underpayment penalty when you file your federal income tax returns. You must also pay self-employment taxes on any income you earn as an independent contractor. In most tax years you must pay 12.4 percent for Social Security 2.9 percent for Medicare. However, the 2010 Tax Relief Act reduces the amount you must pay for Social Security to 10.4 percent for self-employment income earned during 2011 only, while the amount you must pay for Medicare remains at 2.9 percent.
- One of the most significant tax benefits for self-employed workers is the deduction for health insurance premiums for every month that you did not qualify for an employer-provided health plan. You do not need to itemize to qualify for this deduction. In addition, for 2010 only, you may deduct the amount of your payments before figuring the base income for your self-employment taxes, which can result in significant savings, according to "The New York Times." Other tax breaks for independent contractors include deductions for an eligible home office and business-related expenses ranging from postage and office supplies to business-related meals and travel, all of which significantly reduce your federal tax obligation.
- Independent contractors file their federal tax returns using Form 1040. Calculate your business-related income and expenses with either Schedule C or Schedule C-EZ. Use the income or loss you calculate on Schedule C or Schedule C-EZ to complete Schedule SE, the worksheet to determine your self-employment tax obligation. If you make quarterly income tax payments, use Form 1040-ES, Estimated Tax for Individuals, which also supplies blank vouchers to mail in with your payment. You may also make quarterly electronic payments on the Electronic Federal Tax Payment System, or EFTPS website.
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