If you work as an independent contractor, income paid to you will be reported on Form 1099-MISC rather than on Form W-2. When you receive a Form 1099-MISC, you must pay self-employment taxes, which are not withheld from your pay. On the bright side, you are entitled to a number of deductions that are not typically available to those whose income is documented on Form W-2.
As an independent contractor, you may deduct the costs you incur to get to and from your work site each day. If you travel to multiple work sites -- to perform in-home services like cleaning or tutoring, for example -- you may include the cost of traveling between sites. When figuring your transportation costs, you may either use your actual expenses or the standard mileage rate. For the 2011 tax year, the standard mileage rate is 51 cents per mile from January through June and 55.5 cents per mile from July through the end of the year.
Costs of Supplies
If you use supplies in your business, you may deduct the amount you pay for them. For example, if you have a cleaning business, you may deduct the cost of cleaning supplies that you purchase and use in your business. Similarly, if you work as a tutor and you incur costs to purchase books or make copies of worksheets for the students you tutor, you may deduct those costs.
If you purchase items of equipment or other supplies that are expected to last more than one year, you may depreciate the expense or -- in some cases -- write off the entire amount in the year of purchase. Internal Revenue Code Section 179 permits the immediate expensing of up to $500,000 for 2011, reduced by the amount by which the total expenses exceed $2 million. In 2012, the limit drops to $125,000 reduced by the excess over $500,000. You may also depreciate items over their useful life. For example, if you purchased a saw for your business and could not immediately expense it, you may pro rate the cost over the useful life. If the saw has a useful life of seven years and cost $1,400, you may deduct $200 per year in depreciation.
If you are self-employed, you must pay self-employment taxes on the income reported on Form 1099-MISC. This tax effectively includes both the employee and employer share of FICA taxes. To avoid penalizing self-employed individuals, the tax code permits you to deduct the equivalent of the employer portion of the self-employment taxes. The employer portion of the self-employment tax equals 7.65 percent of the Social Security wage base and 1.45 percent of income over the Social Security wage base. In 2011, the Social Security wage base is $106,800. In 2012, it increases to $110,100. For example, if in 2011 you have $40,000 of self-employment income, you could deduct $3,060 of self-employment taxes. This deduction is taken as an adjustment to income on Form 1040, so you do not have to itemize your deductions to take advantage of it.
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