There are so many positives to being a freelancer or independent contractor. Not only are you your own boss, but you have control over how, when, and where you work. You can pick up work based on your schedule and needs, working as much or as little as you please. However, one of the downfalls independent contractors face is doing their own taxes because they are much more complex than getting a simple W-2 from an employer. Here are 5 tips that can make filing your income taxes as a contractor easier and less stressful.
Don’t Get Behind in Your Record Keeping
One of the most frustrating things independent contractors do is let their record-keeping and receipts sit until tax time, causing them to have to scramble to get their taxes prepared.
Put Back Taxes from Your Income
Instead of coming up with a lump sum at tax time (which filing quarterly would ease the burden of at least a little), put back a percentage of all of your taxable income. If you want to be safe, some people deduct up to 25% of their income and move it to a savings account. That way they get a “tax return” back because there is a buffer there to cover what taxes they will actually owe in. It will also help in case any unforeseen tax or other business expenses pop up. The excess can be optimized even further by adding it to a retirement fund (which is something important to consider because unlike an employee, you aren’t putting part of each paycheck into a retirement fund or 401k).
Maximize Your Deductions
This kind of goes hand in hand with doing your research, but find out what you can deduct from your taxes to maximize your deductions. For example, if you work from a home office, you can claim certain expenses and household utilities. Office expenses, gas milage, donations, and other business-related expenses can be deducted to save you money on filing your taxes.
Do Your Homework
When you receive more than $600 pay from a company or client, you should be receiving 1099-MISC to add to your schedule C form. Also, net earnings over $400 require you to pay self-employment taxes to Medicare and Social Security (schedule SE). However, you can deduct half of that SE tax towards your expenses on your form 1040. The same goes the other way–if you hire employees or contractors to do work for you, you must also fill out 1099-MISC, W-2s, etc for those employees or contractors as well.
Hire a Sales Tax Consultant
The easiest way to make sure you get your taxes done right is to hire a sales tax consultant to do them for you. Yes, you still need to keep up with bookkeeping and tracking expenses, but it takes the burden and fears off of you of messing something up or getting audited. You can even outsource the bookkeeping and record keeping to streamline the whole sales tax compliance process.
Being an independent contractor gives you the freedom and flexibility to balance your life as you see fit. Don’t let the stress of handling more complex taxes take away from that freedom.
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