When it comes to taxes, independent contractors have additional responsibilities above and beyond those of conventional employees. With extra forms and numerous deductions, it can be easy to overlook small details or miscalculate. While there’s no way to completely protect yourself from the dreaded tax audit, you can reduce your odds of being singled out by eliminating poor tax practices. Here are four best practices to follow to avoid being audited.
One of the most common tax audit red flags is simple math errors. Whether you’re filing on your own or looking over your accountant’s work, don’t hesitate to take a second and third scan through the numbers. Check the math, making sure the totals in your columns add up and that your capital gains and losses are recorded correctly. Use exact numbers rather than rounding up and rounding down, and confirm the numbers on your state returns match the numbers on your federal returns.
This may sound silly, but another popular reason the IRS may pull a filing is because people forget to sign their tax return. While this easily preventable oversight isn’t usually enough to trigger an audit, it can draw attention to your file which can expose other errors, omissions, and mistakes. Be sure to carefully review every page—print or digital—checking details such as your Social Security number, spelling of your name, or other small typos.
Underreporting income either drastically or consistently can put you at risk for an audit. You should be able to back up everything you report and claim on your tax return—especially as an independent contractor. Make a habit of tracking all of your expenses and receipts as well as the business reason behind them. Failing to report your true income in addition to extra money you may have received throughout the year, such as the sale of an asset like a house, can result in paying back-taxes, penalties, and interest, and lead to further investigation.
The IRS allows the self-employed to write off many crucial supplies, equipment, and costs. While this is a great benefit, these deductions are also more closely scrutinized. Deductions should be proportional to your income. Expensive meals, non-work related travel, and home office deductions can be red flags. Many people abuse the home office deduction, so if you take this deduction, make sure you comply with the requirements. A home office must be your principal place of your business and you must use this space exclusively for conducting business. That said, if you have the documentation to back up your deductions, don’t be afraid to claim them.
Always remain prepared for an audit by maintaining detailed records of your business activities, expenses, and income, and keeping these records for a minimum of three years. Refer to IRS guidelines if you are unsure of anything, or speak with an accountant or bookkeeper.
Looking to minimize your risk and make sure your taxes are filed properly? Let MBO Partners handle taxes and while you run your business. For more information, contact us today or visit our self-employed solutions page for details.
Disclaimer: Content on the MBO Partners blog does not constitute legal or financial advice.
News and notes for independent professionals and their clients. This is the July 24, 2017 edition.
Make the most use of your valuable time as an independent contractor with these organizational strategies for your workspace.