Working as an independent contractor can be a great alternative to working a "nine-to-five" job, especially if you're a self-motivated person. Unfortunately, with being an independent contractor also comes some potentially complicated tax situations. If this will be your first year filing taxes as an independent contractor, your best bet is to work with a professional tax service to get the guidance you need. As you prepare to begin your taxes, however, there are some basics that you should be aware of moving forward.
It's Up to You to Track Your Income
When you're working with a "traditional" employer, you can count on your employer to provide you with regular pay stubs and an annual W-2 that tracks your income. When you're an independent contractor, on the other hand, you're responsible for tracking and reporting every dollar you make. If you do a lot of work for a client in one year (typically more than $600 worth), you might receive an earnings statement in the form of a 1099--but this is not always the case. Rather than counting on clients providing you with 1099s, be sure to track your income carefully in a spreadsheet throughout the year.
You'll Probably Need to Pay Self-Employment Tax
Self-employment tax is one of the biggest burdens of being an independent contractor. The current self-employment tax rate in the United States is 15.3%; 12.4% of this is allocated to your Social Security contribution and the remaining 2.9% goes towards Medicare. Be sure that you're setting aside some extra money to cover this tax.
You Might Have to Pay Taxes Quarterly
In some cases, you might be required to pay estimated taxes every quarter instead of waiting to file and pay your tax bill by April of each year. This is typically the case for independent contractors who expect to owe $1,000 or more in taxes by the end of the year.
You Can Probably Write Off Your Home Office
If you have a home office that you use exclusively for work, you can probably write it off your tax return to save you money. This works by simply deducting the portion of your rent or mortgage that is allocated to your home office space. If you're eligible, taking advantage of this deduction can drastically reduce your tax burden.
Filing taxes when you're an independent contractor can be complex, but with a little practice and help from a tax professional, such as those found at Ruben D. Rosas, Inc. Accounting & Tax Solutions, you'll be better prepared next year!Share