Sugar, the first thing you need to know about becoming an independent contractor is the tax treatment. W-2 employees have their taxes taken out throughout the year, federal income taxes (at varying rates based on situation), social security taxes (7.65% from the employee and a matching percentage from the employer), and medicare taxes (1.45% from the employee and a matching percentage from the employer. An independent contractor is responsible for federal income taxes and both the employee and employer's portions of the social security and medicare taxes.
On the positive side, there is a wide range of expenses that are deductible for independent contractors. The deductions are above-the-line, meaning they do not have to meet a certain amount in order to reduce your tax liability.
You also get an adjustment (subtraction to federal taxable income) for 1/2 of your social security and medicare wages owed.
In order to reduce penalties and interest on a possible balance due (since no taxes are withheld during the year), you might consider paying estimated taxes.
Here is the form you will fill out at the end of the year to report your independent contractor income and deductions: http://www.irs.gov/pub/irs-pdf/f1040sc.pdf. Also, here are the instructions for that form to give you an idea of what deductions are available to you: http://www.irs.gov/pub/irs-pdf/i1040sc.pdf. You may request a hard copy of the instructions from here: http://www.irs.gov/formspubs/page/0,,id=10768,00.html.
If you would like information about paying estimated taxes, you may find it here: http://www.irs.gov/pub/irs-pdf/f1040es.pdf.
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