If you work from home as an independent contractor, tax time can be a very stressful time of the year. This post will provide some tips on how independent contractors can make sure they don’t end up owing Uncle Sam a a lot of money.
Make sure you’re properly classified as an independent contractor and not an employee.
The IRS provides a publication to help you do this. Publication 1779, “Independent Contractor or Employee” provides information the tree factors the IRS uses to determine if you’re properly classified: behavioral control, financial control, and the relationship of the parties. If you believe you’ve been improperly classified, there is a form that can be filled out and sent to the IRS, Form SS-8. Provide the reasons you believe you’ve been improperly classified on this form, send it to the IRS, and they will review it and determine if you’ve been improperly classified.
Once you determine that you are definitely an independent contractor, set aside money out of each paycheck to cover the estimated tax payments you may have to make to avoid paying a lot in income taxes at the end of the year.
The IRS provides Form 1040ES to help you calculate your estimated quarterly tax payments. In order to complete this form, you’ll need your previous year’s tax return, as well as certain information provided in the form 1040 ES instructions. Once you’ve figured out your estimated quarterly tax payments, you can then decide how much you’re going to save out of each paycheck.
Be sure to keep track of any business-related expenses you incur during the year.
You can deduct business-related expenses on your income tax return, both in your itemized deductions on Schedule A, and on Form 8829, Business Use of Home, if you work out of your home. You can deduct a portion of your rent or mortgage payments, utility bills, repairs and maintenance to the part of your home that you use for business, as well as mortgage interest if you’re a homeowner. However, if you do not keep track of these expenses, and you have no receipts to support them, you could get in a lot of trouble if the IRS decides to audit you.
It’s also important to know what other tax deductions you’re entitled to.
If you use your personal vehicle for work, you can deduct mileage. If you do any other traveling, such as traveling to business meetings by plane, you can deduct 50 percent of your meal expenses. Gifts you buy for clients are also 100 percent deductible when you’re traveling. Once again, be sure to keep track of your receipts for these purchases.
If you’re still not sure whether you’re figuring your income taxes correctly, get help from the IRS or an income tax professional.
Wait times to speak to the IRS can be lengthy, especially at tax time. However, they can provide helpful insight that might keep you from being audited and possibly having to pay more tax penalties. And they can send you hard copies of the previously-mentioned publications if necessary. If you don’t have the time to hold for the IRS, going to an income tax preparer or tax accountant can be a better way to get any help you need. In addition, the fees you pay to have an income tax professional prepare your taxes are deductible, and many firms provide audit defense services in the event the IRS does decide to audit you.
Working as an independent contractor can be a profitable way to earn a little extra money, or even replace your existing income, but it’s important to make sure you’re keeping accurate records so you don’t end up owing a lot at tax time. These five tips will help save you money on your tax return, and also help ensure that your tax return is as accurate as possible. Have fun running your own business!