Income Taxes

• A consultant working as an independent contractor is not an employee of the company. Rather than receiving a W-2 form that shows federal tax, state tax, Social Security and Medicare withholdings, the independent contractor receives a 1099-MISC form, which shows only the total compensation paid. The income is reported on Form 1040, Schedule C, the self-employment schedule. The gross income from the 1099-MISC is reported. Business expenses such as licenses, advertising, insurance, mileage, etc. are listed and subtracted from the the gross income to report the net income. The advantage to the independent contractor consultant is that many types of business expenses can be deducted. The net income from Schedule C is carried to the Form 1040, where it is added to all other forms of income.
  
  

Self-Employment Tax

• The self-employment tax is in addition to the income tax and is commonly overlooked by individuals starting their own business. The self-employment tax is 15.3 percent of the income, representing the Social Security and Medicare contributions for the individual. For 2011 only, the tax is reduced to 13.3 percent as part of the economic stimulus plan. When treated as an employee, the employer pays half of the Social Security and Medicare taxes, while the employee pays the other half through withholding from paychecks. A self-employed consultant must pay both halves of the taxes through the self-employment tax. Self-employment tax is separately figured on Schedule SE. The total tax bill due April 15th will include both income tax and self-employment tax.
  
  

Health Insurance Adjustment

• An independent contractor consultant is able to use health insurance premiums to reduce taxable income. The health insurance premiums are treated as an adjustment that reduces the amount of total income subject to tax. The adjustment is limited to the total net income from self-employment as shown on Schedule C.
  
  

Workers' Compensation Insurance

• As an independent contractor consultant, an individual is not covered by workers' compensation insurance from an employer. This means that injuries on the job are not insured, nor would income be paid during a hospitalization or rehabilitation. Most personal health insurance policies specifically exclude work-related injuries. An independent contractor consultant should investigate the purchase of workers' compensation insurance for self-coverage, which would be treated as a deductible business expense.