An independent contractor has many more tax considerations to take into account than a person who is solely an employee. Here is some tax advice to help independent contractors stay on top of tax issues.

Our goal is to maintain your independent contractors status. If you primarily work for one client the IRS might rule that you are actually an employee rather than an independent contractor. This could very well be true especially of you are working on the client’s premises, with their equipment and under their direction. If they rule that you are an employee you will lose the ability to deduct your expenses while not gaining any benefits that a regular employee has. If possible, it is best to have several clients and use your own equipment that way IRS can’t say otherwise.

There is also the possibility that IRS might rule your business a hobby if it doesn’t show in 3 out of 5 years. The IRS is more likely to make this ruling if this business isn’t your only or primary form of income. If this happens, you will only be able to deduct expenses up to the amount of any income you make from the business. There is still another way to prove that your venture is a business and not a hobby, even without making a profit, if you run it in a businesslike fashion. Here are some ways to demonstrate this:

1. have a business plan
2. Use a separate bank account for business. Never mix business and personal finances.
3. Use a separate phone line for business
4. Keep records of all business activities
5. Maintain a consistent and professional image

Pay your quarterly taxes on time. Since an independent contractor does not have taxes deducted from client checks, you must pay estimated taxes on a quarterly basis if your tax liability for the year will be more than $1,000. If you omit to do this, the IRS may penalize you. The due dates for quarterly taxes are usually the fifteenth of the month in January, April, June and September each year. Make sure to check the IRS for the exact dates each year. If you do not make the correct payments by the due date or do not pay enough estimated tax payments to cover most of your tax liability for the year, the IRS may penalize you.

Beware though, not only do you have to pay your portion of social security taxes as an employer would; you also have to pay the employers portion. Fortunately, you can deduct the extra portion from your income when you file your federal income tax return.

You want to be sure that you keep close records of all your expenditures so that you know exactly how much you spent. Even if someone else does your bookkeeping, its still good to keep track in a separate spreadsheet so that you can track your expenses. Make sure to keep all receipts of purchases as backup for your records.

Be watchful to keep good records of the usage of cars, computers and cell phones if these items are used for your personal use also. The IRS is especially observant in checking the deductions for these items. It’s a good idea to keep a log of each of these items showing the miles driven for business, the hours the computer is used for business and the business calls made from that cell phone.

If you purchase equipment, some equipment can be expensed as soon as it is bought instead of being depreciated. This should lower tax liability in the current year. The current limit on the amount that can be expensed in any year is $100,000. The purchase of computer software can also be expensed; formerly it had to be depreciated over several years. Watch out for the IRS, they have be known to disallow tax benefits for a previous year if it later finds that the expensed equipment is not being used more than 50% of the time in the business.

Get your business a separate phone line if you don’t already have one. This will let you be able to deduct telephone costs and not have to use your own personal line for business. This helps show that you are running a business rather than a hobby.

There is a possibility that you are able to deduct part of the expenses for your home if your primary office or place of business is in your home. The deductions can include part of your rent or mortgage payments, depreciation, utilities insurance, real estate taxes and repair costs. The part of your home that you use for business must meet one of the following criteria:

1. Be used on a regular and exclusive basis for the business.
2. Be used to meet with clients or customers.
3. Be a separate structure on your property, not attached to your home
4. Be used to store inventory or sales samples.

If you own your home and choose to use the home office deduction be aware that when you sell the house, you will have to reduce the cost basis of the home by the depreciation on the house. This is true even if you did not take a deduction for the depreciation. You may only deduct depreciation up to your gross profit from the business less any other expenses from the business and the deductible mortgage interest and taxes. However, you may carry over any unused depreciation expense forward to the next tax year.

Make sure and keep good records, conduct your business like a business and be thorough in keeping up with tax changes and your financial life as an independent contractor will be much smoother; at least the tax for the part.