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FOR IMMEDIATE RELEASE: March 4, 2002

TAX BREAKS FOR INDEPENDENT CONTRACTORS

A tough job market and a slowing economy have more workers taking on jobs as independent contractors. If you're among them, or would like to be, it is important that you understand the tax rules involved. According to the New York State Society of CPAs, for tax purposes, independent contractors are treated as running their own businesses. This makes them eligible for many tax benefits that are limited or not available to employees.

Federal or state taxes are not withheld on behalf of independent contractors as they are for employees. Instead, independent contractors pay estimated taxes directly to the IRS four times a year. This means independent contractors get to hold onto their money longer before turning it over to the IRS.

Because the ordinary and necessary costs of operating a business are tax deductible, independent contractors can complete Form Schedule C to deduct the full cost of most business expenses. Here are some common deductions available to independent contractors.

Home Office Expenses - The home office deduction is available to those who use an area in their home regularly and exclusively for business purposes. In addition to regular and exclusive use, you must use your home as your principal place of business or as a place to meet clients or customers or conduct administrative or management activities if no other location where you can conduct these activities exists.

Equipment Costs - Normally, you cannot take a business deduction for the entire cost of a capital asset in the year you place it in service. However, under Section 179 of the tax code, you can deduct up to $24,000 in both 2001 and 2002 for the cost of work-related equipment. This provision provides you with an immediate deduction, rather than one spread out over a period of years.

Business Meals and Entertainment - If you entertain present or prospective clients, you may be eligible to deduct 50 percent of the expense as long as it is related to your business. Just be sure to record the date, amount, location, business purpose, and individuals involved. Documentary evidence is required to support expenditures of $75 or more.

Health Insurance Premiums - For 2001, you can claim up to 60 percent of the health insurance premiums you paid for yourself, your spouse, and dependents as a deduction to arrive at your adjusted gross income (AGI). (The deduction increases to 70 percent in 2002.) The remaining portion of health insurance costs may be added to your itemized medical expenses - an addition which could help you reach the necessary threshold of 7.5 percent of your AGI.

Transportation Expenses - If your home is your principal place of business, you can generally deduct the cost of traveling from your home to any business destination. If your regular office is outside of your home, you may not deduct the cost of commuting to or from that office, but you may be able to deduct the cost of traveling to see clients.

Legal and Professional Fees - Fees you pay to lawyers, tax professionals, and consultants concerning issues related to your status as an independent contractor or to your work in general are deductible in the year they are incurred on Form Schedule C.

Dues and Publications - Newspapers, journals, and books related to your work are deductible, as are dues to professional associations and organizations on Form Schedule C.

Retirement Accounts - One of the biggest breaks available to independent contractors is the ability to set up a tax-advantaged retirement plan and, in many cases, contribute more than an employee could. Earnings aren't taxed until you start drawing on the account so you get a current deduction for your contribution in addition to tax-deferred growth. Keoghs or Simplified Employee Pension (SEP) plans have been the recommended choices for the self-employed.

CPAS STRESS THE NEED FOR GOOD RECORD KEEPING

As an independent contractor, keeping accurate records of income and expenses is critical. Good records can facilitate the task of preparing a complete and accurate tax return and also serve to substantiate your deductions in the event of an IRS audit.

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PUBLIC SERVICE ANNOUNCEMENT TAX BREAKS FOR INDEPENDENT CONTRACTORS

If you worked as a freelancer or independent contractor last year, you may be entitled to some tax deductions for 2001 that can help offset the costs of running your business. The New York State Society of CPAs points out that you can deduct up to $24,000 in business equipment costs, as well as 50 percent of the cost of business meals and entertainment, and 60 percent of health insurance premiums. You also can deduct all unreimbursed ordinary and necessary expenditures related to your business such as work-related publications, dues paid to professional associations and work uniforms.