There are countless benefits for those who freelance or operate as an independent contractor. You control your own time, can be your own boss and have the ability to say yes or no to work based on your overall interest and availability.
In addition, the Internet age makes being an independent contractor easier and in more demand than ever. What are we getting at? Many independent contractors fear tax time as it can be complicated. It doesnâ€™t have to be though. Here are six tips for making tax season as painless and stress-free as possible when youâ€™re an independent contractor.
Know What to Expect
If youâ€™re paid $600 or more by an individual client, you should receive a 1099-MISC from that client. Typically, you include Schedule C with your tax return to report any self-employed income â€“ along with any deductions for business expenses. If your net earnings from self-employment exceed $400, you will have to pay self-employment tax for Social Security and Medicare â€“ which is figured on Schedule SE. You then deduct half of that SE tax as an adjustment to your income on Form 1040. If you have any employees or hire independent contractors yourself, you must file W-2 or 1099 forms for them, as well.
Be Diligent With Paperwork
Deductions can help trim your tax bill come April. Keep all paperwork for business travel, office supplies, gas mileage, and any other business-related expenses. Keep a file on your desk for these receipts and one in your car if possible. Put the receipts in the files immediately, and you will save yourself considerable time and headaches in the future. For the more technology savvy, there are online tools like Intuit QuickBooks.
Pay Tour Taxes Quarterly
Traditional employers deduct and pay employee taxes to the IRS monthly, but not for independent contractors. Independent contractors are required to pay taxes on a quarterly basis â€“ in April, June, September, and January â€“ if the annual tax liability exceeds $1,000. An easy way to accomplish this is to save a portion of each paycheck in a separate tax account. Form 1040-ES is also a great tool for helping independent contractors calculate and make estimated quarterly tax payments.
Work From Home
If you regularly use a portion of your home or apartment (or a separate structure not attached to your house) as your principal place of business, you can claim deductions for that space. Your office qualifies as a principal place of business if you use it solely to perform administrative duties. Expenses that may be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs, and depreciation. How much you can deduct depends on the percentage of your home or apartment that you use for your business. The write-off is claimed on Form 8829, and is deducted on Schedule C.
Plan for Retirement
The two most common self-employed retirement plans are a Simplified Employee Pension plan and a Keogh plan. In either one, you can contribute up to 25 percent of your net earnings from self-employment, which is your net Schedule C profit minus the deduction for half of your self-employment tax. The maximum annual contribution for 2017 is $54,000, which compares pretty favorably to the $5,500 cap on IRA contributions ($6,500 if you are 50 or older). While a Simplified Employee Pension plan can be established for 2016 as late as April 15, 2017 (or if you filed an extension, October 15, 2017), a Keogh plan must be established by Dec. 31, 2016 to accept contributions for 2016.
Hire Your kids
Sole proprietors who hire their kids to do data entry, answer phones, clean the office, and perform other business-related activities can deduct their wages on Schedule C, provided the compensation is appropriate for the type of work involved. If your children are under 18, their wages are exempt from Social Security tax, and are not subject to federal unemployment tax if they are under 21.
And unless your kids have accrued tons of unearned income, chances are good they wonâ€™t owe income tax on those wages. This lowers your familyâ€™s tax bill considerably by rendering taxable income from you (the parent) non-taxable when it goes to your children. Bonus: As a parent, you can make a contribution to an IRA (or a Roth IRA) for your kids based on their wages. Over time, this will hopefully grow into a nice nest egg for their retirement.
Remember to always consult a financial professional before making any changes to your portfolio. For more information, visit the IRSâ€™s Self-Employed Individuals Tax Center.