WASHINGTON (AP) -- Some people work for themselves because they like the autonomy. Others have been unable to find full-time, regular jobs and have had to settle for contract work for a specific project or period of time. And still others have retired but have been brought back as consultants by their former employers.
Contract workers, consultants, freelancers or the self-employed -- these workers face additional challenges when it comes time to file their income taxes.
They won't receive the traditional W-2 that other workers get reporting income and taxes paid. Instead, they'll receive a 1099 form with their earnings from each of their employers.
However, employers aren't required to provide 1099 forms if income is less than $600. Still, all income, even if there is not a 1099 form, is required to be reported to the Internal Revenue Service.
Since self-employed individuals or contract workers don't have taxes withheld from their pay, they could be in for an unpleasant surprise. "You could be really hurt if you haven't paid any estimated taxes," said Jackie Perlman, principal tax research analyst with The Tax Institute at H&R Block.
Not only will these workers have to pay taxes on income earned, they'll also have to pay a self-employment tax, said Barbara Weltman, contributing editor to J.K. Lasser's Your Income Tax 2013.
That self-employment tax is equivalent to both the employer's and the employee's share of Social Security and Medicare. For 2012, it is 13.3 percent, 10.4 percent for Social Security on income up to $110,100 and 2.9 percent for Medicare on all income.
And, they may be subject to a penalty if they did not file estimated taxes.
But there is a bright side.
"The tax code smiles on people who are self-employed," said Mark Steber, chief tax officer for Jackson Hewitt Tax Services. That's because you can offset the true cost of doing business, he said.
Did you take a potential client out to lunch? You can generally deduct half the bill as a business meal.
Did you have to purchase a printer to produce invoices? That, too, can be deductible, as well as the paper and toner that you've used for the business.
Did you use your car for work other than commuting, to see a customer or to go to that business meal, for example? The IRS mileage rate for 2012 is 55.5 cents for each business mile driven.
"Make sure you know where those deductions are because there are a lot of them," Steber said.
To be deductible, a business expense has to be both ordinary and necessary, according to the Ernst & Young Tax Guide 2013.
"An ordinary expense is one that is common and accepted in your field of business, trade or profession," the guide says. "A necessary expense is one that is helpful and appropriate for your trade, business or profession."
If you use some items, say a computer, for both personal and business purposes, you'll have to track the time and usage to determine how much can be deducted. "Have that stuff contemporaneously documented along the way, not the day you get the letter from the IRS," suggested Greg Rosica, tax partner at Ernst & Young.
Some education expenses may be deductible, as well.
What you can't deduct: regular commuting costs or personal expenses unrelated to the business.
Business-related deductions are more advantageous for a self-employed taxpayer because they directly reduce income, thus lessening the amount of taxes owed, said Rosica. Traditional W-2 employees can deduct unreimbursed business expenses only if they total more than 2 percent of income.
As W-2 employees can pay for health insurance with pre-tax dollars, self-employed individuals similarly can reduce income by the cost of their health insurance. The same goes for contributions to a qualified retirement plan.
Good recordkeeping is critical.
"In order to deduct your business expenses, you have to keep good books and records," Weltman said. "It's mandatory."
If you're self-employed, you'll have to file Schedule C, Profit or Loss From Business, to report your business income, and Schedule SE to compute your self-employment tax, along with your 1040 form. There's also a separate form, 8829, if you use your home for business purposes.
"If you use an extra bedroom to run your online business, you can take a home office deduction for the extra bedroom," the IRS says as an example. For the 2010 tax year, more than 3 million taxpayers claimed the deduction, according to the agency.
But the IRS says claiming the deduction often can often involve "complex calculations of allocated expenses, depreciation and carryovers of unused deductions."
So beginning with the 2013 tax year, taxpayers will have a simpler option for computing the deduction: $5 per square foot of space used, up to $1,500.
"Where there's complexity, there's opportunity," Steber said.
"You can take advantage of it, help yourself from a tax position."