Independent Contractor issues

June 8, 2012 7:41 AM

What are the benefits of being an independent contractor?

I have been hired as an independent contractor at a new job. It hasn't started yet but is coming up fast. I am trying to figure out how to best leverage this situation for tax purposes, as that is pretty much why people go this route from what I have read/heard.
I would like to hear from others that have gone down this road regarding their experiences, or from CPA or tax attorneys who have relevant experience in this area.
I am imagining being able to deduct things relating to my "business expenses" and such. Home office, percentage of utilities for said office, travel, supplies and equipment for the job.
I am planning a trip to the lawyers office and looking for a small business accountant but would like to hear first hand experiences as well.
Thought that popped into my head after reading some other askmefi IC posts: Taxes when taking into account my wife who works...
Thanks
a3

posted by a3matrix to work & money (11 answers total)

Others can give you more substantive advice, but people increasingly "go this route" because employers have found it to be advantageous to offer jobs as contracted positions rather than internal employment.
posted by snuffleupagus at 7:45 AM on June 8, 2012 [2 favorites]

Yeah, please don't make the mistake of thinking that the tax advantages are for individuals. Most of the time, independent contractor status allows the employer to lower their expenses, by not having to do things like deducting taxes for the employee, offloading benefits entirely onto the employee, etc.
posted by Tomorrowful at 7:51 AM on June 8, 2012 [3 favorites]

If you aren't getting paid at least 50-100% more than what you would if you were an employee, you're getting screwed.
posted by valkyryn at 8:07 AM on June 8, 2012 [10 favorites]

I am in this situation as I am in a different country to the organisation. It sucks. You are responsible for more tax issues, insurance, all your office expenses (not totally offset by deductions) and so on. In my country, as self employed I need to prove I am not only working for them but also engaging other clients. This means more work and finding contracts on top of full time contracting/consulting. I get no holiday or sick pay. My salary is far lower than when I was employed. Negotiate if you can.
posted by wingless_angel at 8:10 AM on June 8, 2012

Yes, for most people this is more of benefit to the employer rather than the contractor.

Some things to be aware of if you aren't (I don't mean to sound condescending if you do know this stuff; I am working as an independent contractor now and am always surprised how many of my coworkers (also independent contractors) don't know this stuff.)

-You will not have your taxes deducted from your paycheck. You should be paying estimated taxes quarterly.

-You will be paying about 7.5% more in taxes since you need to pay both portions of social security/medicare (normally you pay about 7.5% and your employer pays 7.5%; when you are your own employer you need to pay both parts

-You will not be paying into unemployment as an independent contractor (you are working for yourself, so you can't lay yourself off) so if this contract ends you may not be eligible for unemployment benefits

-No health insurance, benefits, etc.-- If you can get added onto your wife's health plan this isn't necessarily terrible; for retirement you can either do a Roth or traditional IRA, a solo 401(k), or just use your earnings to contribute more to your wife's plan

-No paid vacation, paid sick days, etc. It is really hard to take a vacation knowing that missing a week of work will cost you more than the plane ticket. There's nothing worse than being home sick with the flu-- except being home sick with the flu and knowing that every day you miss of work is actually costing you money.

From what I understand, going the contractor route can be beneficial for some highly-paid individuals. For most of us, however, that is not the case.
posted by matcha action at 8:10 AM on June 8, 2012 [7 favorites]

I have been hired as an independent contractor at a new job.

Start with this language. Employees are "hired". Independent contractors are "engaged", or "put under contract", or any number of other semantic distinctions.

I am trying to figure out how to best leverage this situation for tax purposes

You may be looking through the wrong end of the telescope. Instead of focusing on "leverage" for tax purposes, think about "leverage" for income purposes. See also: If you aren't getting paid at least 50-100% more than what you would if you were an employee, you're getting screwed.

Yes, there are some tax advantages. If you're in a 25% tax bracket, for example, that $10 thingamabob you bought in order to do your job really only cost you $7.50. On the other hand, you have to spend the money to get any advantage. And you have to earn it before you can spend it.

Don't confuse "independent contractor" with "self-employed", which really can offer a greater range of flexibility and options.
posted by John Borrowman at 8:28 AM on June 8, 2012 [1 favorite]

You get paid nights and weekends. This is the major benefit for my own industry.
posted by shownomercy at 8:42 AM on June 8, 2012

You may not be an "independent" contractor.
Yes if: You make your own hours and submit a bill for services.
No if: You are required to be "at work" at a certain hour in a certain place for a certain number of hours.
Yes if: You do not have any deductions taken out of whatever check you receive
No if: The company deducts taxes or FICA witholding.

I'm sure there are others.
posted by Gungho at 9:07 AM on June 8, 2012

What "kind" of work do you do? That can make a difference.

Are you a sole-proprietorship, incorporated?

The "type" of business structure you have chosen can also make quite a difference to which and how much expenses you can deduct.

Does your personal "business" have a seperate office location/mailing address than your personal home? That can also make a difference for things like leased "company" vehicles, assets, etc.

Are you paid hourly? As others in this thread have said - you should be earning at least 50-100% more than you were as an employee. Thanks to all the overhead you now incur.

(Less with sole-proprietorship - but with that comes greater personal risk, liability - and decreased ability to claim certain things as business expenses)

Retain a very good accountant - hand them your paperwork (receipts) and pay them what they are worth to ensure you do not get into a tax liability mess down-the-road...
posted by jkaczor at 1:34 PM on June 8, 2012

All that being said - out of my 21 years in my field, I have been an independant contractor for at least 14 years... I wouldn't trade it for the world - in Canada it is the only true way to get ahead.

Admitedly, as I am in Canada - healthcare is provided for ... yes, dental/vision/medication I have to pay up-front for, but I can claim those receipts.

Also... do you have to now carry insurance? (Errors and ommisions?) That factors into your rate - as well as the amount of vacation you plan on giving yourself - and any work-related training, skills upgrades, etc.

The next thing, key in Canada to being recognized as a true independant contractor is to ensure you have several different (possibly overlapping) clients during the course of your fiscal year.

(Besides... why keep "all-of-your-eggs-in-one-basket", right?)
posted by jkaczor at 1:41 PM on June 8, 2012

I wanted to say thank you to all who posted replies. I have read all of them and taken away what I can. I do intend to get a CPA to work with me on this as truly, I don't even know enough to be dangerous.
Thanks again folks.
a3
posted by a3matrix at 11:05 AM on June 12, 2012