As the year draws to a close, it’s common to take some time to look back on the performance of your business. Reviewing your back office—records, taxes, expense tracking, billing, etc.—is another helpful practice to prepare for the new year. Organizing paperwork and making sure records are accessible will help ease the burden of searching for documentation and wondering what you did and didn’t do throughout the year when it comes time for those final tax payments.
If you are new to the world of independent contracting, you are likely just getting used to setting aside a portion of your income to pay quarterly taxes throughout the year. If you’re a seasoned veteran, you’ve probably already discovered that estimating slightly higher payments than what you paid in the previous year is a good rule of thumb to avoid having to correct underpayments in the spring. Take advantage of some downtime over the holiday season and make sure your business is prepared for the new tax year with these tips.
Review Income and Expenses
A good place to start tax preparation is to review your income and expenses for the past year. Take a look at your billings and expenses—these should all be recorded in some sort of management system such as an accounting software system, spreadsheets you keep updated, or via a personal 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.
Look at 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 the spring.
If you do think you’ve underpaid throughout the year, try to set aside additional income in the next few months for this payment. If you’re having trouble calculating what you owe versus what you’ve paid, consider working with a tax advisor who can help you navigate independent contractor tax laws.
Evaluate 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 keep an eye out for 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.
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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.