Workers who find themselves without a full-time position often turn to temporary work while looking for their next permanent position. Taking on temporary employment can have a major impact on your taxes. Your arrangement might keep you on payroll as an employee, or might reclassify you as an independent contractor. While temporary work can be stressful, it can also bring a number of tax deductions with it.
Tax Returns as an Employee
The majority of workers are considered employees. The company is responsible for paying a portion of its employees' payroll taxes, paying unemployment tax, and withholding for employees' income taxes. At the end of the year, the company has to send its employees Form W-2, reporting how much income they earned and how much tax was withheld. The employee can take that information and put it directly on her Form 1040. Most deductions available to employees must be itemized on Schedule A, and only if taken in place of the standard deduction.
Tax Returns as an Independent Contractor
Independent contractors have to manage much more of their own tax compliance. They pay self-employment tax, which is both the employee’s and employer’s portion of payroll taxes, and make their own estimated quarterly tax payments. Companies send independent contractors Form 1099, which independent contractors report on Form 1040 Schedule C. Most free tax return preparation programs don’t include Schedule C, so you will likely pay more to prepare your taxes as an independent contractor. The additional paperwork comes with the benefit of being able to subtract your business expenses from your income and still get to take the standard deduction.
Itemized Employee Expenses
As a temporary employee, your company might require you to take on certain expenses. If it reimburses you, then those expenses have no impact on your taxes. If it doesn’t, then you can deduct those expenses on Schedule A. Common expenses include uniform costs, dues paid to professional organizations and continuing education costs. While travel expenses for commuting to work typically aren’t deductible, temporary employees can deduct the cost of driving to work. Independent contractors take the same deductions but report them on Schedule C.
Looking for a permanent job can be expensive. Fortunately, if you are looking for a permanent position in your current line of work you can deduct job hunting expenses such as resume preparation, long distance calls, career counseling and travel to the interview. Like other temporary employee deductions, you include these costs on Schedule A as miscellaneous deductions, which are reduced by 2 percent of your adjusted gross income. For example, if you have an AGI of $50,000 then you would reduce your total miscellaneous deductions by $1,000.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.