6 Things to Know About Filing Taxes as an Independent Contractor
Working as an independent contractor or freelancer is a great way to gain financial independence and freedom over your schedule. And more people are doing it than ever before.
In fact, more than 35 percent of the workforce does at least some freelance or contract work each year.
Freelance and contract work can be rewarding, but there are challenges unique to self-employment that you won’t have to worry about with a traditional job. The toughest challenge is taking care of taxes each year.
Here are a few things you need to know about filing taxes as an independent contractor so you can keep your business safe from the IRS.
1. You’ll Need to Pay Quarterly
When you work as a traditional employee, you only have to make tax payments once each year. However, when you’re filing taxes as an independent contractor, you’ll need to pay more often.
The IRS expects you to make quarterly estimated tax payments every year. The estimate comes from what you expect to make from your freelance work throughout the year. Even the most seasoned freelancers have to guess at this number.
When in doubt, overestimate. The more you pay in quarterly taxes, the less you’ll owe come Tax Day.
If you think you’re off the hook just because you also have a full or part-time job, you’re not. You’ll need to make the quarterly payments on the freelance income you earn every year that you’re working as an independent contractor.
2. You’re Required to Report All Income Earned
Though many freelancers and independent contractors get paid through direct deposit, some still receive cash under the table. If you’re one of them, you know that it’s tempting to hide those cash payments from the IRS.
Don’t. Doing so can get you in serious trouble if you get audited.
Get in the habit of reporting all income earned during the year. Include everything from investment income, money earned from your regular job, and any income from your freelance or contract work.
Remember, most businesses that hire contract employees will report the amount they paid you to the IRS and will send you a 1099-MISC form to make filing your taxes easier. That form creates a paper trail and makes it easy for the IRS to tell if you’re paying enough in taxes at the end of the year.
Even if your employer doesn’t send you a 1099-MISC form, report the income you earned from the work you performed anyway.
3. The Amount You Pay Can Vary From Year to Year
It’s rare for freelance and contract workers to have consistent incomes every year. Unfortunately, the amount that your earnings fluctuate can make predicting your tax liability difficult.
Be ready for changing tax payments every year and do your best to estimate what you’ll owe accurately. The IRS lets you base your calculations on your previous year’s earnings.
Think about how much you expect to earn over the course of the year. Remember, you’re responsible for paying the full 15.3 percent self-employment tax rate on top of the taxes owed in your tax bracket.
Determine your tax bracket by looking at your total estimated earnings from every income source you have. Then, base the quarterly payments on that amount. If your income is likely to go down over the year, adjust your payment amounts accordingly.
4. Taxes Aren’t Withheld Automatically
One of the most important tax tips for independent contractors that you need to remember is that you’re responsible for withholding tax payments. When you work for a traditional employer, they withhold a portion of your paycheck for your taxes every two weeks.
When you’re a freelance or contract worker, you’re working for yourself. This means it’s up to you to withhold money from each paycheck or payment you receive.
If you’re not sure how to keep yourself from spending the money you receive, be proactive. Set up a savings account and automatically transfer your estimated quarterly payment amounts from your bank account as needed. This will keep the money out of sight and makes it less accessible to you on a daily basis.
5. When in Doubt, Document Everything
There are many different deductions you’ll be able to qualify for when filing self-employed taxes. You just need to be able to prove that you qualify for those deductions when you file your taxes.
This means you’ll want to keep copies of your receipts, business expenses, and anything else you have that might help lower your tax liability each year. There’s no such thing as too much documentation when it comes to getting the deductions you deserve.
It’s also a good idea to keep copies of those records for several years after you file taxes. This way, you’ll have everything you need to show the IRS if you get audited.
6. Working With an Accountant Is Best
As a self-employed independent contractor or freelancer, you’re constantly worried about keeping your business profitable. You may not have time to prepare your taxes or may struggle to remember when your quarterly payments are due.
Unfortunately, this can lead to a serious penalty for not filing 1099 taxes on time.
Instead of trying to do everything yourself, consider working with an accountant. They’ll help you stay on track and can even make sure you’re taking the maximum number of deductions that you can.
You may end up saving more on your taxes than you spend working with the accountant over the course of the year.
Filing Taxes as an Independent Contractor Takes Work
As a freelance worker, you’re no stranger to hard work and long hours. Filing taxes as an independent contractor will take time and it’s not something you can put off until the last minute.
You need to stay on top of your quarterly payments and make sure you’re paying enough each quarter to reduce your risk of audits or penalties. As long as you take your time and do what you can to be as accurate as possible, you’ll be in good shape.
Looking for more tips to help you better streamline the tax filing process? Check out our latest posts.