I retired from my job early in 2016 and then did some part-time consulting work for my old company. I was paid a few thousand dollars as an independent contractor. What tax forms do I need to file, and what can I deduct?
You should receive a Form 1099-MISC from your old employer by the end of January reporting your self-employed income for 2016. You’ll need to report that income on a Schedule C accompanying your tax return. You may be able to use the shorter Schedule C-EZ if your business expenses do not exceed $5,000, you have no employees and you don’t claim a home-office deduction (see below). If your net earnings are more than $400, you’ll also need to file Schedule SE to figure your Social Security and Medicare taxes.
The good news for you as an independent contractor is that you can deduct many of your business expenses -- such as the cost of a computer, printer and other equipment you use in your work, plus the cost of work-related phone calls and mailings, office supplies, duplicating, advertising and business travel. You can also deduct legal and professional fees for your business, books and publications you purchase for your business, and the cost to rent an office space (or you may qualify for the home-office deduction if you work regularly and exclusively in your home). Half of the Social Security and Medicare taxes you pay is also deductible.
Also on the list of write-offs: your health insurance premiums, if you aren’t eligible for health insurance from an employer or your spouse’s employer. If you’re on Medicare, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of medigap or a Medicare Advantage plan. This deduction shows up on your Form 1040, not the Schedule C, and is available whether or not you itemize deductions. You can’t deduct more than the net income of your business.
See IRS Publication 535 Business Expenses for more information about tax-deductible business expenses.
Independent contractors can deduct the cost of a home office if they use part of their home regularly and exclusively for a freelance business. See the IRS’s home-office deduction factsheet and Publication 587 Business Use of Your Home for more information. If you qualify, you have two options for taking the deduction: You can use the simplified option, which lets you deduct $5 for every square foot in your home that qualifies for the deduction (up to a maximum write-off of $1,500). Or you can use the regular method, which is based on your actual expenses, deducting a portion of your mortgage interest or rent, utilities, property taxes, homeowners insurance and other expenses based on the percentage of your home you use for your work. For example, if your home office is one-fifth of the square footage of your home, you can deduct 20% of those expenses. You’ll also be able to deduct the full cost of certain direct expenses for your home office, such as the cost of maintenance and repairs to that part of your home. See IRS Form 8829 Expenses for Business Use of Your Home for more information.
Self-employed people can make tax-deductible contributions to a solo 401(k) or Simplified Employee Pension based on their self-employed income. It’s too late to open a solo 401(k) for 2016 (you needed to open the account by December 31 but have until April 18, 2017, to make contributions if you already have an account). But you still have time to open and contribute to a SEP, which is similar to an IRA and offered by many brokerage firms, banks and mutual fund companies. See How Self-Employed Workers Can Save for Retirement to help calculate how much you can set aside in either plan.
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Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.