Life as an independent involves a different approach – the same can be said for independents come tax time. Since many independent consultants receive payment on a 1099, and not tax-remitting W-2 basis, it’s important to note that tax time for independents isn’t often as straightforward as simply plugging a few numbers into an online tax calculator.
In today’s post, we share ways to make sure you are filing your self-employed taxes compliantly – with as little headache as possible!
Self-employed professionals have a lot of advantages. They can choose their projects, clients, and generally, their work location. But with this freedom comes great (tax) responsibility.
Independents should plan to pay at least 30 to 35% of their total (gross) income in taxes. These include income tax (per your tax bracket), as well as both halves of Social Security and Medicare (FICA). This is also known as the self-employment (SE) tax. If you are solely a 1099 worker, you are not responsible for paying into unemployment, however, you would not be eligible to take advantage of this benefit either.
As a self-employed professional, your estimated tax payments are due quarterly. This is for both your benefit and the government’s. Since taxes are not remitted from each payment made by clients to consultants, quarterly filing helps eliminate a massive tax burden at the end of each year.
Each quarter has a “hard” deadline of the 15th of the month in January, April, June and September.
To file, you’ll generally use Form 1040-ES, Estimated Tax for Individuals to calculate and pay these taxes.
If your business satisfies the below criteria, you can save time, reduce paperwork, and limit any issues when filing your taxes through the Schedule C-EZ form.
You can generally use this form if your business:
The IRS makes it easy to deduct qualified business expenses. If the expense is “ordinary” or “necessary,” it can be deducted. These can include expenses that are…
Also, if you have a home office, or a space at home exclusively used for work, it can generally be claimed as an office-in-home expense, no matter the size of the office. Further, your travel costs from a home office to a client site can also be eligible to be a work expense deduction.
Document, document, document.
Be sure to keep records of all your business spending and expenses – they’ll be needed in case of an audit. Save those receipts (including gas!) and written records of payment; pictures are helpful as well, especially ones of your home office since that deduction is often viewed with more scrutiny. Stay precise, too, as exact figures in your list of expenses will be less cause for any “red flags.”
We understand many self-employed professionals spend most, if not all of their workday at home. For those in this category, be aware of the telecommuting tax penalty.
Essentially, if you work outside your client’s state, you could be taxed by both the employer’s state as well as your state of residence.
Legislative changes are being made to avoid this problem, but not all states have completely resolved this potential issue – we suggest consulting with a tax advisor to ensure your compliance is up-to-date with your state(s) legislature(s).
Before any of the items above apply, it’s important, and required, to determine your business entity.
Selecting from the choices above will depend on the size of your business, as well as its annual (projected) profit. Making this decision can be difficult, so it’s important to put in the proper research, if not consult an accountant.
Hate filing quarterly? MBO Partners eliminates that burden, enabling independents to run their business and manage their tax burden. For more information, contact us today or visit our self-employed solutions page for additional details.
Disclaimer: Content on MBO Partners blog does not constitute legal or financial advice.
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News and notes for independent professionals and their clients. This is the September 19, 2016 edition.