Independent contractors (ICs), also known as freelancers and the self-employed, are people who typically do not work full-time for a single employer, may work for a variety of companies, and often work from home. In addition to being organized enough to keep track of work coming in and going out, meeting deadlines, and invoicing clients, you will need to know the complicated workings of health insurance and taxes for ICs.
The IRS defines an independent contractor as a person who offers his services to the general public and who has the right to control or direct only the result of the work, not what will be done and how the services will be performed.
The Small Business Association says an independent contractor:
• has his own tools and sets his own hours
• has more than one client
• invoices for work done
• maintains a separate business checking account
• keeps business records.
If you’re working from home and do not have a boss or supervisor watching over your shoulder, you will need to have an outstanding work ethic. Yes, you can work in your PJs if you wish and you can work at 2:00 a.m. if that is your thing. But ultimately you need to budget your time to get your work done for your clients. Working moms enjoy the freelance life because it affords a less restricted schedule than a full-time job, but be sure you can set aside enough quiet time to concentrate on work and provide a professional product.
Health insurance is one of the major concerns for freelance workers. If you are single or your spouse does not have access to a family plan policy, you will need to purchase your own health insurance. Consult an insurance agent (who has knowledge of many types of plans) or search online for health insurance aimed specifically at the self-employed.
The challenge is to get an affordable policy that provides the amount of coverage you need. Depending on your current health and health history, you may have access only to a policy with an astronomical deductible. However these policies typically give you the option of opening a tax-free Health Savings Account to save money for a future medical expense.
One more benefit for the self-employed: health insurance payments are deductible from federal income tax.
A home office or work space needs to be large enough and clean enough to give you the emotional encouragement that you are running a business, not participating in a hobby. A folding table in the laundry room won’t inspire the professional attitude you need. Invest in a comfortable chair, large and sturdy computer table, laptop or desktop computer, printer, and adequate lighting that won’t hurt your eyes.
Taxes for the Self-Employed
Taxes for the independent contractor can be complicated, so educate yourself or consult a tax professional who can give you some tips. Many items you buy and activities you perform in your everyday duties can be deducted as a business expense.
In addition to obvious materials such as paper, printer ink, and hardware, you can also deduct such expenses as:
• computer repair costs
• online memberships
• mileage on your car when you go to the post office or visit clients
• clothes for meeting clients
• a portion of your house expenses (insurance, heat) for your home office
• classes or lectures you attend that help you run your business.
The self-employed need to make quarterly tax payments directly to the IRS. The amount for each payment is estimated based on your previous year’s annual income. When you file your next year’s taxes, you will either have to make up the difference if you estimated too low or receive a refund if you paid too much.
The National Association of the Self-Employed offers information for self-employed and small business owners on:
• health insurance
• payroll and invoicing
• starting a business
• resources and webinars
• and how to make your concerns known in Washington.