Year-End Tax Planning Strategies for Independent Contractors

As the year draws to a close, it’s common to take some time to reflect on your business’s performance. Reviewing your back office—records, taxes, expense tracking, billing, and more—is another helpful way to prepare for the new year. Keeping paperwork organized and ensuring records are easy to access will help ease the burden of searching for documentation and wondering what you did or didn’t complete when it’s time for those final tax payments.

If you’re new to independent contracting, you’re likely still getting used to setting aside a portion of your income to pay quarterly taxes throughout the year. If you’re a seasoned professional, you’ve probably already discovered that estimating slightly higher payments than the previous year is a good rule of thumb to avoid underpayment corrections in the spring. Use some downtime during the holidays to make sure your business is ready for the new tax year with these tips.

Evaluate Income and Expenses

A good place to start tax preparation is by reviewing your income and expenses from the past year. Look over your billings and expenses—these should be tracked in a management system such as accounting software, an organized spreadsheet, or through a trusted accountant.

Income and expenses should all be backed up with receipts and invoices and ideally stored in both paper and digital form. This will be a big help in the case that your business is ever audited. When reviewing this information, make sure your past tax information, including your quarterly filing paperwork, is up-to-date as well.

Review Your Taxes from Last Year

Reviewing your tax payments from last year can be a helpful indicator of what you should be paying this year. If you are doing a similar amount of business and have not increased your rates, you can expect that quarterly payments should be comparable. If you’ve done slightly more business or increased your rates, your quarterly payments should be higher. By comparing what you’ve paid so far to what you paid last year, you can get a good idea of whether or not you will owe money come spring.

If you think you’ve underpaid during the year, try to set aside additional income over the next few months. If you’re unsure what you owe versus what you’ve paid, consider consulting a tax advisor who understands independent contractor tax laws.

Determine Eligible Deductions

As an independent contractor, you may be eligible for a number of different tax deductions. If you’ve taken certain deductions in the past, you are probably already familiar with what you qualify for. But as your business needs and expenses change over time you may find that you are eligible for new deductions as your company grows.

Deductions to consider include:

• Marketing: you may be eligible to deduct advertising and promotional expenses directly related to business activities such as paying for an ad, purchasing business cards, or hiring someone to create your personal website.
• Office space:  If you work from home and your workspace is exclusively dedicated to your business you may be eligible for the home office deduction. You can also deduct office equipment and supplies such as a laptop, pens, printer ink, paper, and software.
• Benefits: Medical, dental, and retirement benefits are tax deductible for many independents.
• Professional development: Educational expenses like taking an online course, pursuing a certification, or enrolling in a class are tax deductible so long as they are related to maintaining or improving skills for your business.
• Travel expenses: If you travel as part of your work, there are certain travel costs you can deduct such as business miles traveled in a car, airline tickets, hotel and housing costs, and airline tickets.

Revisit Your Business Structure

As your independent business grows, it’s worth reviewing whether your current business structure still makes sense. If you’re operating as a sole proprietor, you might consider forming an LLC or S corporation for potential tax advantages and added legal protection. Consult with a tax or legal advisor to understand what structure best aligns with your goals and income level. Even small adjustments now can lead to more efficient tax handling and long-term savings.

Plan Ahead for the New Tax Year

Once you’ve reviewed your finances and gathered your records, take some time to plan ahead for the coming year. Set calendar reminders for quarterly tax deadlines, update your estimated payments based on expected income, and make sure your recordkeeping system is organized from day one.

If your business income is increasing or you’ve added new clients, it may also be worth reviewing your retirement savings options—such as a SEP IRA or Solo 401(k)—to see how you can reduce taxable income while building long-term savings. Preparing early will make next year’s tax season smoother and help you stay confident about your financial picture all year long.

Check Out: 9 Self-Employed Tax Deductions You May Overlooking

More Tools and Resources for Independent Professionals

If you’re looking for more support to grow your small business, explore MBO Partners’ blog for expert tips and strategies. You’ll find helpful advice and insights to help you take the next step on your independent journey. 

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs.  Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.