For most, tax season is done for quite a little while, although it’s never too early to start for next tax season. If you’re an independent contractor, then you probably feel like you are never quite out of tax season.
But if this is going to be your first time filing taxes as an independent contractor, it can be hard to know where to begin. Here are a few basics:
Independent Contractor Tax Responsibilities.
When you were an employee for a company, many of your tax obligations were taken care of directly through your employer. Now that you are filing independently, you will have to be aware of certain rules and payments you will need to start making on your own.
Before you do anything, you will need to make sure that you are, in fact, considered a contractor based on the legal definition from the IRS. If you aren’t certain, you can file a form SS-8 to confirm your status with the IRS.
Next, you will need to start making quarterly tax payments. You can do this using form 1040-ES. Quarterly payments are due on June 15, September 15, January 15, and April 15. Estimated quarterly tax payments are based on the amount of money you earned during that quarter and the total amount you expect to make for the year. The IRS offers instructions on how to figure out what those estimated tax payments should be. Fortunately, this number doesn’t have to be perfect as you can correct any errors you discover during your annual tax payment.
In addition, you will need to account for Social Security, Medicare, and any other employment taxes that would normally be deducted from a paycheck. You can do this during your annual tax payment during the spring by filing the Self-Employment tax form.
Finding Ways to Save.
As a contractor, you now have new options available to you in saving money on your taxes that would not have been available to you previously. Effectively anything that you can justify as a business expense can be claimed as a deduction for tax purposes. This might include:
Costs of maintaining your home office. Home office deductions are based on the approximate percentage of your living space that is taken up by your home office. So you can deduct, for example, a proportional amount of your home owner’s insurance as an expense. You could also deduct costs of cleaning your home office as well as expenses for office supplies including things like a new computer or printer.
Travel expenses. Keep a careful count on your mileage whenever you need to do any traveling for work. Even if you only need to drive a little ways once or twice a week, this can really add up over the course of a year.
Food expenses. Do you ever take clients out to lunch? Or maybe you are a food reviewer for one of your contracting jobs? You can claim virtually all of the expenses of your meal as a business expense, including your parking fees at the restaurant.
Medical expenses. Now that you are not dependent on a business health plan, you can deduct much, if not all, of the costs of your personal health plan as a business expense.
Consider filing as a corporation. It means a little bit of extra paperwork and does add some complication into the mix, but as a corporation you will qualify to claim some of your earnings as non-taxable dividends.
In order to claim all of these deductions, be sure to effectively track your expenses. You will need to save as many receipts as you possibly can. Remember, don’t claim any credits and deductions that you wouldn’t be able to defend during an audit!
Ways to Make Taxes Easy.
If this is your first year paying independent contractor taxes, you may be feeling a bit overwhelmed with all the new responsibility. Here are a few tips to help you get started with simplifying the process:
Get professional help from communitytax.com. Professionals can help you make sure you’ve filed everything correctly and that you are building a sustainable tax plan for your home business.
Mark down on your calendar all of the deadlines for your tax payments. Once you’ve gotten used to paying your quarterly taxes, it’ll be easy to make quick payments before each deadline.
Start setting aside money each month for your tax payments. This way, you won’t later find yourself in a position where you don’t have enough money for your tax payments.
Once you’ve figured out a method for dealing with your independent contractor tax payments, it will become easy and you can go back to enjoying the benefits and pluses of being your own boss.