Tax Tips for Tech Comm Contractors

By Scott Betler, CPA

For those of you who have decided to venture out on your own: congratulations. Now that the celebrations are over, it’s back to reality. Although you have crawled out from under the thumb of a boss, you’ve also given up that comfortable bi-weekly paycheck to become an independent contractor. Having taken this big step a few years ago, I offer a few words of advice on how to keep the clutches of the tax man from grabbing too much of your earnings. I’ll give it to you straight: no weasel words here.

First, the bad news: self-employment (SE) taxes. In addition to the federal and state income taxes, you must pay an additional 15.3 percent tax that represents both the employer share and the employee share of Social Security and Medicare taxes. Remember, you’re wearing both of those hats now. This tax is calculated on the net profits from your self-employment. So to minimize the tax, you could maximize your expenses. Well, not exactly.  Unfortunately, deductions such as retirement contributions and health insurance, while deductible for income tax purposes, are not deductible for self-employment tax purposes.

A way around some of this may be to incorporate. Then, at least, your health insurance (and possibly other health care costs) could be deductible. Also the employer contribution to your retirement savings could be deductible. But there are a number of costs and inconveniences needed to accomplish this, and you must weigh whether those costs are worth the tax savings you might realize. Some of the costs include:

• The incorporation process
   
• Annual corporation commission filing
   
• Annual federal and state income tax returns
   
• Quarterly payroll tax returns
   
• Annual pension plan returns
   
• Annual employee benefit plan returns
   
• High corporate income tax rates for personal service corporations

If you already have some employees and you are making big bucks, looking into incorporating may be worthwhile.  For the rest of us, the costs associated with incorporation probably are not worth whatever tax savings we might realize.  So what to do? 

Maximize your retirement contribution anyway.  This may not save you SE tax, but it will help you save some federal and state income taxes, and “forces” you to save as much as you can toward your retirement. That is a good thing.

Keep track of your mileage. The most recent Federal rate for business mileage is 48.5 cents per mile. 

If you travel you can use the Federal per diem rates for meals and incidentals. Save your lodging receipts, self-employed people cannot use per diem rates for lodging, you must go with what you actually paid.

Buy the equipment that you need. Need a new computer? Buy it. When using a Section 179 deduction you don’t always have to depreciate asset purchases over a number of years, and you can expense those items in the year of purchase up to $100,000 or your net profit (whichever is less).

If you work out of your home, take advantage of the office-in-home deduction. Based on the ratio of your office space to the total square feet of your home, you can take a percentage of your utilities, insurance, mortgage interest, real estate taxes, home maintenance and repairs, and depreciation on your home.

And most of all: Keep track of all of the other expenses related to your business. Your tax preparer may be able to consider other tax strategies you had not considered. Keep track all year, not simply at the last minute when you have to get that shoebox together before you visit your accountant.

Congratulations again on your big venture. Remember to keep good records and to be as organized as possible: we CPAs charge by the hour, and that includes weeding through the contents of those shoeboxes.

Scott Betler is a Certified Public Accountant licensed in Arizona and Maryland and a principal in the firm of Betler & Flynn CPAs, PLLC, with offices in Sedona and Phoenix.

Questions? You can call Scott at (928) 284-2779.