Tax time is around the corner. If you’ve declared yourself an independent contractor, here are some things you should know when it comes to taxes.
You should receive a Form 1099-MISC reporting your total earnings ($600 or more) with each payer you have done business with. If you have not received all of them by January 31 of the year following payment, you will need to contact the payers to let them know.
Make sure you keep a record of all your expenses. You’re eligible for tax deductions related to your work. Keep all receipts for equipment and supplies, and services needed in order to run your business. If you travel for work, record your mileage and car expenses, and hotels and meals if applicable.
“The IRS allows independent contractors to deduct indirect and direct expenses related to work. Indirect expenses are not directly related to the job, but are incurred as part of doing the jobs, such as utilities. Direct expenses are costs that are directly related to doing work, such as phone services, postage, supplies and other necessary work items or services. Home-based contract workers are allowed to take the home office deduction if the primary location for the work is done at home. If travel is also a part of doing your work, keep track of mileage, hotel and other travel-related expenses. Other possible deductions include health care insurance costs, retirement savings accounts and professional service fees, such as lawyers or accountants.” (Small Business Chron)
If you know your tax liability will be more than $1000 during the year, you are required to pay quarterly taxes in April, June, September, and January. Use Form 1040-ES to help calculate your payment. There are also money-management software programs that can help you keep track of your payments.
Independent contractors are also responsible for paying Self-Employment Tax, which includes Social Security and Medicare. This tax is paid only in April. Use the Self-Employment tax form when filing. Half of the self-employment expense is deductible on Form 1040, so don’t forget to factor it in when you’re doing your taxes.
There is definitely more paperwork involved with being an independent contractor, but the tax advantages are worth it. The more organized you are in keeping a record of your expenses for business, the easier it will be for you come tax time.
Tiffany Buczek is a freelance writer and licensed esthetician located in Southern CA.