Whether you go it alone, hire a tax preparation professional, or take advantage of MBO’s tax preparation and filing assistance, tax season doesn’t have to be a daunting day on your calendar. So long as you prepare ahead of time, take the proper steps, and compile the information you need, your annual tax filing will be simple and painless.
1. Gather Your Paperwork
Whether you’re doing your own taxes or having them prepared by a professional, it’s important to make sure you have all the information you, or they, will need. When the deadline for filing annual taxes approaches, the last thing you want to be doing is scrambling to get all of your financial data together—or worse, filing with inaccurate information which could end in potential serious fines, penalties, or even prosecution.
Ideally, the majority of the information you’ll need—records of expenses and documentation of all income—is already consolidated in your accounting system, be that an outside accountant or your own billing or accounting software. You should also make sure that you have access to the documents that show your income and expenses, ideally in both paper and digital form. Should you get audited, having thorough documentation can be invaluable.
At the very minimum, make sure you have the following documentation:
- Records of all income, including 1099s received from clients
- Receipts for business-related expenses
- Past tax information, including your quarterly filing paperwork
2. Determine Your Obligations
Income tax may not be the only tax you are responsible for, so it’s important to understand other possible tax requirements you may face. The majority of independent contractors are considered to be self-employed and are therefore subject to paying self-employment tax in addition to income tax.
However, there are situations and circumstances in which this tax may not apply to you. For instance, how your consultancy is incorporated may affect your obligation regarding this tax. In addition, whether or not your consultancy made a significant profit during the past year could also be a factor. More information about self-employment tax requirements can be found on the IRS website.
3. Obtain Proper Forms and Documents
In addition to affecting your eligibility for things like self-employment tax, your consultancy’s legal status also determines the forms you need to file with the IRS. Filing the wrong forms could cause delays that result in penalties and fines, or, at the very least, extra hassle and wasted time. While the exact forms you need will vary depending on factors such as your income, the structure of your business, and state laws, two common forms you’ll need for federal income tax filing are:
If your consultancy is structured as a partnership, LLC, or another form of business, different tax forms may apply to you. You can learn more about the forms applicable to various business types on the IRS website.
4. Consider Potential Deductions
As an independent, you can deduct additional business-related expenses to lower your tax liability. As you prepare for tax season, research and keep in mind various deductions you may be eligible for along with records and receipts of all expenses you plan to deduct. A few categories of potential deductions include:
- Home Office: If you work from a dedicated office space in your home, some of the costs associated with that space, such as partial utilities, may be deductible.
- Office Supplies: from home office hardware to business-specific furniture, your office supplies may also qualify as an additional deduction.
- Health Insurance: If your consultancy’s business structure means you have self-employment income, you may be able to deduct a percentage of your health insurance premiums for yourself and your dependents.
More information on business-related tax deductions can be found on the IRS website.
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.
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