How can contractors recoup taxation-related expenses?
They are already indirectly paying these expenses.  They should be built into your rates. The amount per job or per hour needs to cover what would have been your salary, plus the what would have been sick, vacation, holidays, health insurance, life insurance, disability, education, overhead for office expenses, cost of accountants...and all taxes. In many companies the general rule of thumb is that they need to charge a customer 2x the employees salary to cover all this plus make a profit. If this is a side job some of these benefits will come from your main job. Some self employed get some of these benefits from their spouse.  The company has said we give you money for the work you perform, but you need to cover everything else including paying all taxes. Depending on where you live you might have to send money in more often then once a year. They are also telling you that they will be reporting the money they give you to the government so they can claim it as a business expense. So you better make sure you report it as income. "Anything is negotiable.  Clearly in the current draft of the contract the company isn't going to calculate or withhold taxes on your behalf - that is your responsibility. But if you want to calculate taxes yourself, and break out the fees you are receiving into several ""buckets"" on the invoice, the company might agree (they might have to run it past their legal department first). I don't see how that helps anything - it just divides the single fee into two pieces with the same overall total. As @mhoran_psprep points out, it appears that the company expects you to cover your expenses from within your charges. Thus, it's up to you to decide the appropriate fees to charge, and you are assuming the risk that you have estimated your expenses incorrectly. If you want the company to pay you a fee, plus reimburse your expenses, you will need to craft that into the contract. It's not clear what kind of expenses you need to be covered, and sometimes companies will not agree to them. For specific tax rule questions applicable to your locale, you should consult your tax adviser."
One possibility that I use: I set up an LLC and get paid through that entity. Then I set up a payroll service through Bank of America and set up direct deposit so that it is free.  I pay myself at 70% of my hourly rate based on the number of hours I work, and the payroll service does all the calculations for me and sets up the payments to the IRS.  Typically money is left over in my business account. When tax time rolls around, I have a W2 from my LLC and a 1099 from the company I work for. I put the W2 into my personal income, and for the business  I enter the revenue on the 1099 and the payroll expenses from paying myself; the left over in the business account is taxed as ordinary income. Maybe it's overkill, but setting up the LLC makes it possible to (a) set up a solo 401(k) and put up to $51k away tax-free, and (b) I can write off business expenses more easily. I suggest you have a professional assist you with this audit, if the issue comes into questioning. It might be that it wouldn't. There are several different options to deal with such situation, and each can be attacked by the IRS. You'll need to figure out the following: Have you paid taxes on the reimbursement? Most likely you haven't, but if you had - it simplifies the issue for you. Is the program qualified under the employers' plan, and the only reason you're not qualified for reimbursement is that you decided to quit your job? If so, you might not be able to deduct it at all, because you can't take tax benefits on something you can be reimbursed for, but chose not to. IRS might claim that you quitting your job is choosing not to get reimbursement you would otherwise get. I couldn't find from my brief search any examples of what happened after such a decision. You can claim it was a loan, but I doubt the IRS will agree. The employer most likely reported it as an expense. If the IRS don't contest based on what I described in #2, and you haven't paid taxes on the reimbursement (#1), I'd say what you did was reasonable and should be accepted (assuming of course you otherwise qualify for all the benefits you're asking for). I would suggest getting a professional advice. Talk to a EA or a a CPA in your area. This answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer "If you receive a 1099-MISC from YouTube, that tells you what they stated to the IRS and leads into most tax preparation software guided interviews or wizards as a topic for you to enter.  Whether or not you have a 1099-MISC, this discussion from the IRS is pertinent to your question. You could probably elect to report the income as a royalty on your copyrighted work of art on Schedule E, but see this note: ""In most cases you report royalties in Part I of Schedule E (Form 1040). However, if you ... are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ (Form 1040)."" Whether reporting on Schedule E or C is more correct or better for your specific circumstances is beyond the advice you should take from strangers on the internet based on a general question - however, know that there are potentially several paths for you.   Note that this is revenue from a business, so if you paid for equipment or services that are 100% dedicated to your YouTubing (PC, webcam, upgraded broadband, video editing software, vehicle miles to a shoot, props, etc.) then these are a combination of depreciable capital investments and expenses you can report against the income, reducing the taxes you may owe.  If the equipment/services are used for business and personal use, there are further guidelines from the IRS as to estimating the split. These apply whether you report on Sch. E, Sch. C, or Sch C-EZ.    Quote: ""Self-Employment Income It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income. All income earned through the taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040. Use Form 1040, Schedule C, Profit or Loss from Business, or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship) to report income and expenses. Taxpayers will also need to prepare Form 1040 Schedule SE for self-employment taxes if the net profit exceeds $400 for a year. Do not report this income on Form 1040 Line 21 as Other Income. Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer. Fees received for babysitting, housecleaning and lawn cutting are all examples of taxable income, even if each client paid less than $600 for the year. Someone who repairs computers in his or her spare time needs to report all monies earned as self-employment income even if no one person paid more than $600 for repairs.""" If you want to subcontract some of your excess work to somebody else, you better be in business!  While some kinds of employees (e.g. commissioned salespeople) are permitted to deduct some expenses on their income tax, generally only a real business can deduct wages for additional employees, or the cost of services provided by subcontractors. Do you invoice your clients and charge HST (GST)?  Or do you tell your clients each pay period how many hours you worked and they compensate you through their payroll system like everybody else that walks through the door?  If you're not invoicing and charging HST (GST) (assuming you exceed the threshold, and if you have too much work, you probably do!), then perhaps your clients are treating you as an employee – by default – and withholding taxes, CPP, and EI so they don't get in trouble? After all, Canada Revenue Agency is likely to consider any person providing a service to a company to be an employee unless there is sufficient evidence to the contrary, and when there isn't enough evidence, it's the company paying for the services that would be on the hook for unpaid taxes, CPP, and EI. Carefully consider what form of business you are operating, or were intending to operate.  It's essential for your business to be structured appropriately if you want to hire or subcontract.  You ought to be either self-employed as a sole proprietor, or perhaps incorporated if it makes more sense to your situation.  Next, act accordingly. For instance, it's likely that your business should be taking care of the source deductions, CPP, and EI.  In fact, self-employed individuals shouldn't even be paying into EI – an independent contractor wouldn't qualify to make an EI claim if they lost a contract. As an independent, one doesn't have a job, one has a business, and EI doesn't cover the business itself, only the employees that the business deals with at arm's length.  As a business owner, you would be considered non-arms-length, and exempt from EI. Growing your business in the way that you are suggesting is an important enough a step that you should seek professional advice in advance.  Find a good accountant that deals with self-employed individuals & small businesses and run all this by him.  He should be able to guide you accordingly.  Find a lawyer, too.  A lawyer can guide you on how to properly subcontract others while protecting you and your business. Finally, be mindful of what it is you agreed to in your contract with your client:  Do they expect all services to be performed by you, personally?  Even if it wasn't written down who exactly would be performing the services, there may be an assumption it's you.  Some negotiation may be in order if you want to use subcontractors. I am not an accountant, but I have a light accounting background, despite being primarily an engineer.  I also have a tiny schedule C business which has both better and worse years.  I am also in the United States and pay US taxes.  I assume you are referring to the US Form 1040 tax return, with the attached Schedule C.  However little I know about US taxes, I know nothing about foreign taxes. You are a cash-basis taxpayer, so the transactions that happen in each tax year are based on the cash paid and cash received in that year.  You were paid last year, you computed your schedule C based on last year's actual transactions, and you paid taxes on that income. You can not recompute last years schedule C based on the warranty claim. You might want to switch to an accrual accounting method, where you can book allowances for warranty claims.  It is more complex, and if your business is spotty and low volume, it may be more trouble than it is worth. At this point, you have two months to look for ways to shift expenses into next year or being income into this year, both of which help offset this loss. Perhaps a really aggressive accountant would advise otherwise (and remember, I am not an accountant), but I would take the lumps and move on. This article on LegalZoom (link here) discusses how to apply a significant net operating loss (NOL) in this year to the previous two years, and potentially carry it forward to the next two years.  This does involve filing amended returns for the prior two years, showing this year's NOL.  For this to be relevant, your schedule C loss this year must exceed your other W2 and self-employment income this year, with other tests also applied. Perhaps a really aggressive accountant would advise otherwise (and remember, I am not an accountant), but I would take the lumps and move on. "I don't see why you would need an ""international tax specialist"". You need a tax specialist to give you a consultation and training on your situation, but it doesn't seem too complicated to me. You invoice your client and get paid - you're a 1099 contractor. They should issue you a 1099 at the end of the year on everything they paid you. Once you become full-time employee - you become a W2 employee and will get a W2 at the end of the year on the amounts paid as such. From your perspective there's nothing international here, regular business. You have to pay your own taxes on the 1099 income (including SE taxes), they have to withhold taxes from your W2 income (including FICA). Since they're foreign employers, they might not do that latter part, and you'll have to deal with that on your tax return, any decent EA/CPA will be able to accommodate you with that. For the employer there's an issue of international taxation. They might have to register as a foreign business in your state, they might be liable for some payroll taxes and State taxes, etc etc. They might not be aware of all that. They might also be liable (or exempt) for Federal taxes, depending on the treaty provisions. But that's their problem. Your only concern is whether they're going to issue you a proper W2 and do all the withholdings or not when the time comes." To be confident in your solution, and get the best solution for you, consult a local accountant, preferably one who is specialized in taxes for businesses.  Or muddle through the code and figure it out for yourself.  The primary advantage in consulting with an accountant is that you can ask them to point out ways you can restructure your expenses, debts and income in order to minimize your tax burden.  They can help you run the numbers for the various options and choose the one that is right, numerically. You need to clarify with Bob what your agreement is. If you and Bob are working together on these jobs as partners, you should get a written partnership agreement done by a lawyer who works with software industry entity formation. You can legally be considered a partnership if you are operating a business together, even if there is nothing in writing. The partnership will have its own tax return, and you each will be allocated 50% of the profits/losses (if that's what you agree to). This amount will be reported on your own individual 1040 as self-employment income. Since you have now lost all the expense deductions you would have taken on your Schedule C, and any home office deduction, it's a good idea to put language in the partnership agreement stating that the partnership will reimburse partners for their out-of-pocket expenses. If Bob is just hiring you as a contractor, you give him your SSN, and he issues you a 1099, like any other client. This should be a situation where you invoice him for the amount you are charging. Same thing with Joe - figure out if you're hiring him as an independent contractor, or if you have a partnership. Either way, you will owe income and self-employment tax on your profits. In the case of a partnership, the amount will be on the K-1 from the partnership return. For an independent contractor who's operating as a sole proprietor, you report the income you invoiced for and received, and deduct your expenses, including independent contractors that you hired, on your Schedule C. Talk to your tax guy about quarterly estimated payments. If you don't have a tax guy, go get one. Find somebody people in your city working in your industry recommend. A good tax person will save you more money than they cost. IRS Circular 230 Notice: Please note that any tax advice contained in this communication is not intended to be used, and cannot be used, by anyone to avoid penalties that may be imposed under federal tax law. "Linkedlinked, You might want to seriously take another look at the links that Chris provided you.  Specifically the ones on the IRS website: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html From the IRS website: Businesses must weigh all these   factors when determining whether a   worker is an employee or independent   contractor. Some factors may indicate   that the worker is an employee, while   other factors indicate that the worker   is an independent contractor. There is   no “magic” or set number of factors   that “makes” the worker an employee or   an independent contractor, and no one   factor stands alone in making this   determination. Also, factors which are   relevant in one situation may not be   relevant in another. The keys are to look at the entire   relationship, consider the degree or   extent of the right to direct and   control, and finally, to document each   of the factors used in coming up with   the determination. Perhaps more importantly... pay attention to what happens if you're WRONG: Consequences of Treating an Employee as an Independent Contractor If   you classify an employee as an   independent contractor and you have no   reasonable basis for doing so, you may   be held liable for employment taxes   for that worker (the relief   provisions, discussed below, will not   apply). See Internal Revenue Code   section 3509 for more information. I would STRONGLY recommend that you and your partners give your accountant a call and discuss the matter.  They will be able to help you make the right decision. One of biggest mistakes businesses make in this are is to classify their employees as independent contractors.  The IRS (who happens to be hungry for money right now) comes in and says, ""Nooooooooo... those are employees."" ...and the COMPANY gets to pay the employment taxes.  I actually have person experience with this as I worked for a company this happened to.  Every contractor was re-classified as an employee except for two (myself and one other).  The key reason in that case was that none of the other contractors had any other clients. While I understand that you have other clients, I would still recommend talking to your accountant for an hour or so... just to be 100% sure. Sincerely, Andrew Smith TaxQueries.com" As far as accounting  goes, if you speak with a CPA, you may be able to reduce the business tax liability.  So... the company buys the truck, deducts it, and the adjusted gross income drops, so he'd pay less tax.  Or something.  You said anything helps, hope you meant it! Not correct. First - when you say they don't tax the reimbursement, they are classifying it in a way that makes it taxable to you (just not withholding tax at that time).  In effect, they are under-withholding, if these reimbursement are high enough, you'll have not just a tax bill, but penalties for not paying enough all year.  My reimbursements do not produce any kind of pay stub, they are a direct deposit, and are not added to my income, not as they occur, nor at year end on W2.  Have you asked them why they handle it this way? It's wrong, and it's costing you. "If all of the relocation expenses are paid by your employer to the moving companies, then you should not have any tax liability for those payments. Relocation expenses should be treated as normal business expenses by your employer. Note I emphasize ""should"" because it's possible that your employer ""could"" consider it income to you, but companies generally do not go out of their way to classify normal business expenses as income since it costs both them and you more money in taxes. As a side note, the reason your company is paying these expenses directly is probably to lessen the likelihood of these expenses being questioned in an audit (in comparison to if they cut you a reimbursement check which could get more scrutiny)." Note:  This is not professional tax advice.  If you think you need professional tax advice, find a licensed professional in your local area. What are the expected earnings/year? US$100? US$1,000?  US$100,000?  I would say if this is for US$1,000 or less that registering an EIN, and consulting a CPA to file a Partnership Tax return is not going to be a profitable exercise.... all the earnings, perhaps more, will go to paying someone to do (or help do) the tax filings. The simplest taxes are for a business that you completely own.  Corporations and Partnerships involve additional forms and get more and more and complex, and even more so when it involves foreign participation.  Partnerships are often not formal partnerships but can be more easily thought of as independent businesses that each participants owns, that are simply doing some business with each other. Schedule C is the IRS form you fill out for any businesses that you own. On schedule C you would list the income from advertising.  Also on schedule C there is a place for all of the business expenses, such as ads that you buy, a server that you rent, supplies, employees, and independent contractors.  Amounts paid to an independent contractor certainly need not be based on hours, but could be a fixed fee, or based on profit earned.   Finally, if you pay anyone in the USA over a certain amount, you have to tell the IRS about that with a Form 1099 at the beginning of the next year, so they can fill out their taxes.  BUT.... according to an article in International Tax Blog you might not have to file Form 1099 with the IRS for foreign contractors if they are not US persons (not a US citizen or a resident visa holder). You report it as an expense against the 1099 income when you do your taxes. You will only be taxed on the amount after the lawyers fees (but if it cost you more in lawyers fees than you recover in damages, the loss is not deductible). Be sure to keep documentation of the lawyers bill and the contract. Compensatory damages are generally not taxable at all. You can see here for more information on that. Well, we work in the power markets. It might be overkill, but several have PhD although there have been a few with masters or CFA charter. The Risk Operations group is less theoretical and a bit less stringent. I know the society of actuaries has a Chartered Enterprise Risk Analyst credential that might be useful.