There are plenty of great benefits to working at home, but if there is one downside most people can agree on, it’s tax time. Since many work-at-home jobs utilize independent contractors, that means you will be responsible for all your taxes, and if you don’t plan throughout the year, April 15 is going to be a day of dread. Here’s how to take some of the sting out of tax time and plan for your work at home taxes year-round.
Are You Really an Independent Contractor or Telecommuting Employee?
The term independent contractor is used pretty loosely and freely in the work-at-home world, but beware that it may not always be used accurately, at least not according to Uncle Sam. Just because your contracting employer refers to you as an independent contractor doesn’t mean that you will be classified as such for tax purposes. In fact, the IRS views independent contractor status as the exception, not the rule. That means you have to make the case that you really are an independent contractor, not an employee.
So what’s the difference?
As a general rule, an employee is directed on how and when to complete the tasks of the job at hand, and typically gets paid on a regular basis such as weekly or biweekly. An independent contractor is given the job that needs to be completed, but the contractor determines how and when the job will be done independently. Also, independent contractors are often paid in a lump sum when the project is complete. By that definition, many so-called “independent contractor” positions are potentially functioning as employees for tax purposes. To make your case you’re an independent contractor, make sure you have a copy of your work agreement on file in case you get audited, although that alone is no guarantee you’ll be classified as a contractor. If you want to clarify your status beyond doubt, you can always ask the IRS to prepare a determination letter declaring your status using form SS–8.
What Tax Forms?
For any kind of state taxes and forms, you’ll need to check with your individual state for specific information.
On the federal level, if you work as an independent contractor, you’ll submit a W9 form to the contracting employer and your income will be reported on a 1099-MISC form at the end of the year. (If you’re a telecommuting employee you’ll get the standard W2.) If you’re not already familiar with form 1040-ES, you better get to know it well and get to know it quickly, as it is the formula used to estimate your quarterly payments. The IRS does not send you notices or bills, but you’re expected to make these payments unless you expect to owe under $1000 in taxes. Let’s hope your work-at-home income generates enough revenue that this exemption won’t apply.
You make quarterly tax payments in April, June, September and January, and the 1040-ES form helps you calculate your estimated tax payments, as well as, being the form you submit when paying them. That is what you do for your income taxes, but also bear in mind that if you’re an independent contractor, you don’t have an employee paying into your Social Security and Medicare, so you’ll also be responsible for your self-employment taxes.
Yes, that means you’ll have to pay it if your net self-employment income exceeds $400 for the year, using 1040 Schedule SE . If there’s any good news in that, it’s that half of that is deductible on your tax form 1040, but you will still be paying more taxes as an independent contractor then you do as an employee.
According to Turbo Tax, independent contractors will owe 13.3% in self-employment taxes on the first $110,100 of net earnings from self-employment. As of 2012, for income above $113,700, you also owe Medicare taxes of 2.9%.
Also, be sure to fill out a 1040 Schedule C if you’re an independent contractor or freelancer, as you are essentially self-employed.
If you work from home, you can deduct expenses for your home office, right? Well, maybe, or maybe not. It’s not that simple — the IRS simply doesn’t do “simple.” One break the IRS does give you is your office doesn’t necessarily have to be a separate room with permanent partitions, but you do have to define the space, whether through walls or furniture or by whatever means.
Note that there is a difference between office deductions for a telecommuter who’s an employee and an independent contractor. If you’re a telecommuting employee, you’ll have to meet a tougher standard to deduct home office expenses, using Form 2016 to calculate your deduction which you enter on line 21 of Schedule A of your 1040. But to even qualify for a home office deduction as a telecommuting employee, your home office has to be a necessity to be employed with that company rather than a convenience for you. In other words, if your company allows employees to work from home so they don’t have to maintain a call center, you qualify for home office deduction. If your company maintains a call center but allows some employees to work from home for their convenience, you won’t qualify.
If you’re an independent contractor or self-employed, it’s a whole different matter when it comes to IRS home office deductions, but you still have to qualify. For example, your office needs to be used exclusively for that purpose and not used as a family room, a playroom or a man cave when it’s not in use as an office. Not only does it have to be exclusively used as an office, but it must be used “regularly and exclusively as your principal place of business.” You may also qualify if you use your office space as a “place to meet or deal with patients, clients, or customers.” If you travel a lot for business but use your home office for all your administrative purposes, you may also qualify for a home office deduction. Independent contractors will use IRS From 8829 to calculate their home office deduction
In 2013, the IRS introduced a simplified option for calculating home-office expenses. While it doesn’t change the criteria for qualifying, it does make the calculations a little bit simpler. Hey, it’s the IRS — take all the help you can get from them.
Don’t forget to include such deductions as utilities, Internet, and phone, where you can get a partial credit as an indirect expense. Other possible deductions that people often overlook include advertising costs, dues and subscriptions for professional organizations and trade publications, fees for legal and tax services, office supplies and depreciation of your office equipment, were you use Form 4562.
Even in traditional employment where your employer calculates your Social Security and Medicare taxes and an estimated payment to the IRS, taxes can seem overwhelming. And for the independent contractor and self-employed, it can feel like a hopeless learning curve. Consider hiring a professional at first to help you with your taxes until you feel comfortable handling your taxes yourself. It’s one of the better investments you can make in your work-at-home career, and best of all, it’s tax deductible.
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