Business and Independent Contractor Tax Deductions Grow in Importance as Obamacare Looms

July 15, 2013 6:18 am1 comment

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For small businesses and independent contractors, taking full advantage of allowable tax deductions is becoming increasingly important.  This week, the US Court of Appeals for the Fourth Circuit in Virginia upheld Obamacare’s employer mandate as constitutional.

Although businesses won’t be required to provide health insurance for their employees until 2015 (the Obama administration chose to delay this key provision), critics argue that the White House’s move is illegalCongress passed the healthcare law stating that the employer mandate must begin in 2014.

Under this new requirement, businesses with more than 50 employees must offer their workers affordable health insurance or pay a penalty to the Internal Revenue Service (IRS).  However, many small businesses are expected to circumvent Obamacare by simply laying off full-time employees and assigning many of the same individuals part-time work in order to stay under the magic number of 50.

Temp Workers

Staffing agencies across the nation are seeing high growth in business because of Obamacare.  Companies are planning to hire more part-time workers, such as temps or seasonal employees, and independent contractors in order to avoid higher healthcare costs and to avoid paying Obamacare-related fines to the IRS.

As millions of taxpayers transition from being full-time employees to independent contractors, they’ll need to familiarize themselves with the IRS’ filing requirements, especially with the 1099-MISC form.

Filing a 1099-MISC is required if a freelancer, small business, or independent contractor earns more than $600 in a calendar year.  More individuals will need to understand what expenses are tax-deductible on their Schedule Cs.

Items such as the home office deduction, office supplies, fuel expenses, cellphone bills, work equipment, subscriptions, and utilities could be tax deductible expenses if they are necessary business expenses.  Failure to keep receipts and list such expenses would result in higher tax bills for millions of Americans, including those who shift to part-time work as contractors or freelancers.

Contractors and Tax Filing

More than 80% of taxpayers file electronically.  If a small business files a 1099 and has filed more than 250 records per year, the IRS requires you to file the tax returns over the Internet.

“[By e-filing], you import in all your data from Excel, [then] review and create the file for transmission,” says Erich Ruth of 1099fire.com, a tax software firm based in Arizona. “[Alternatively], when you mail in the red-ink forms, there is a certain hope that [the IRS] received the forms and everything is okay.”

Administrative and regulatory requirements should also become much more expensive for many taxpayers as Obamacare gets implemented.  Assessment and collection of the fines will be managed by the IRS.

“With a 1099 form, you have to print and mail Copy B to the recipients by the end of January. That is a lot of work and expensive,” says Ruth.  “Stamps cost money along with envelopes, paper, folding, stuffing, sealing and mailing. A really good question is: ‘Will the IRS ever make it possible to distribute these forms in a way other than mailing because mail is expensive?’  They are just starting to consider emailing options if the recipient signs off that they will accept files this way.”

Some who have snail mailed their tax-information get letters from the IRS stating that their returns are incomplete.  This costs time and money.  Taxpayers who e-file their 1099s often use software that have built-in tools advising the user what information are needed.

Image: iStockphoto

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