April 11, 2022
Five Tax Filing Tips Independent Contractors Need to Know
7 Minute Read
Filed under: Work at Home Hacks
Being a freelancer or independent contractor has a lot of advantages, but it’s important to keep in mind you will still have to report and pay taxes to the IRS. If you make more than $600 per year with a particular company, that company will report it to the IRS via a 1099 form, which means you must pay taxes. Even if you work part-time as a freelancer, you’re obligated to pay taxes on any amount over $400 per year. To make it easy on yourself, we’ve put together a list with a few tax tips for independent contractors, which include the following:
1. Keep Meticulous Records
When you’re an independent contractor, you need to be recording every expense and every bit of income you receive. From the very start, you’ll be better off with detailed records every time you spend money to set up the business and every time you earn just a tiny bit of income. Keep every receipt and scan it so you have digital copies of everything.
You can use a digital bookkeeping system to keep your records if you’re comfortable with technology, or you can simply write everything down in a notebook or folder. However you do it, just make sure you keep detailed records of every single transaction you make from day one.
2. Always Pay Estimated Taxes Throughout the Year
As an independent contractor, you never know how much you’ll have to pay in taxes at the end of the year. To prevent getting hit with a tax bill all at once, you should make quarterly tax payments to the IRS. This way, you’re not paying one lump sum on April 18th and therefore the taxes are a lot easier to afford. It also means that from the very beginning, you’ll want to save a certain portion of your income to pay to Uncle Sam four times a year.
How much money should you send in each quarter? That depends on what you expect to pay in total taxes at the end of the year. Many people start with 15-20% of their income, but you can pay more or less than that if you like. The important thing is to pay the IRS something once a quarter to make that April 18th tax bill a lot easier to pay.
3. Become Familiar with Your Deductions
As with other types of employment, independent contractors have certain deductions available to them, and those can be very different from other types of workers. Generally, independent contractors can deduct many of the same expenses as other business-owners do, but if you’re unsure which deductions are allowable and which ones aren’t, check with an expert that specializes in this type of employment so that all your deductions are legitimate ones.
For starters, you can deduct a portion of the expenses involved in using a home office, including certain bills, utilities, and even the office itself. Certain travel expenses and meals can also be deducted, but again, there are IRS rules for which deductions are allowed and which ones aren’t. Before you get too carried away with the deductions you’re trying to claim, make sure to get expert support.
4. Start a Retirement Fund
When you’re working for yourself, it’s easy to forget that one day, you’ll be retired and need a retirement income. If you seek advice from a financial expert, you can learn about different IRAs and other ways to save money for the future, and the sooner you start, the easier your future will be.
If you’re self-employed, you can contribute up to 25% of your net earnings to a Simplified Employee Pension (SEP), although there is a maximum amount you can contribute each year. If you’re the sole proprietor of your business and hire no workers, you can also put up to $12,000 in a simple IRA (individual retirement account). You cannot start too early planning for your retirement, and a good accountant or financial planner can help you get started.
5. Consider Your Health Insurance Needs
One of the most convenient aspects of being an independent contractor is that you can deduct all the premiums you pay for your health insurance come tax time, and you won’t have to itemize them on your tax form. In fact, the law even allows you to deduct the cost of the health premiums of your spouse and all your dependents. So, even though your health insurance premiums may feel a little pricey, keep in mind that come income tax time, you can deduct what you’ve paid for these premiums when you file.
Additionally, if both you and your spouse are included on the health insurance policy, you can deduct the insurance from your self-employment income and taxes. The laws are very detailed regarding the deduction of healthcare expenses, so again, you may need the help of a financial expert to make sure you’re not deducting something that you shouldn’t. Keep in mind that the tax laws also tend to change almost every year, which makes consulting with a tax expert a smart thing to do.
The Bottom Line
Independent contractors get to enjoy numerous tax benefits because they work for themselves. While it may feel overwhelming to think about doing your taxes as a self-employed individual, the laws are not that complicated once you get used to them. If you have any questions or concerns about your taxes, seek out expert advice because they are the only ones who can help you with the right answers.