independent contractor taxes

7 Tips for Filing Independent Contractor Taxes

Freelancers or independent contractors compose 34% of the U.S. workforce.

This is often a surprising number for most independent contractors who may feel that they’re on their own, especially come tax season.

Unfortunately, all freelancers are still subject to tax laws and must file tax returns along with everyone else.

This can be understandably intimidating for many contractors. Self-employment tax, after all, can feel incredibly high and daunting. Tax returns themselves can be confusing.

Luckily, it is possible to navigate independent contractor taxes with confidence. Read on for insight!

1. Keep Track of Expenses

This is the most important thing to keep in mind when filing independent contractor taxes. You will be able to write off any work-related expenses as deemed fit by the Internal Revenue Service (IRS).

This is applicable even if you aren’t a business owner.

If you aren’t already in the habit of doing so, start keeping track of all eligible expenses. Common work expenses include mileage to and from sites of business, air travel for business purposes, and office or computer supplies.

If you went to Chile last year for a business trip but spent a few days vacationing, you can still write 100% of these trip expenses off. As long as the main purpose of such a trip was business, it’s an eligible expense.

Business meals also count as work-related expenses for the same reason.

To effectively monitor business expenses, establish two separate accounts: one for personal purposes and the other for business. If possible, use only credit cards when completing business transactions to keep an automatic record of payments.

If you prefer to use cash, hold onto receipts from the prior year.

2. Choose E-Filing Over Paper Filing

It’s essential to e-file your independent contractor taxes to minimize the risk of error. Paper returns have an error rate of about 20%.

E-filed returns, on the other hand, have a negligible error rate.

E-filing software like ultimatetax.com can also be helpful for self-employed individuals who prefer more guidance as they are completing their returns. Some software even has certain packages that cater specifically to independent contractors.

When you e-file your returns, you also automatically generate digital copies of your tax information. This can be vital for future filing and tax payment purposes.

3. Know Your Eligible Deductions

To maximize the return on your taxes (and to minimize tax payments), it’s important to know which deductions you are eligible for.

First and foremost, it’s key to confirm that you are in fact an independent contractor. Independent contractors receive 1099-MISC forms from the companies or individuals they are working with.

In general, independent contractors can deduct work-related expenses from the previous quarter or tax year. They can also deduct health insurance premiums they have paid if their plan is not provided through an employer or spouse.

Additionally, independent contractors can deduct any expenses incurred for having a home office. This includes rent paid for the home office, utilities, and cost of materials or electronics.

Learn more about the home office deduction here.

If you’ve made contributions to a 401k or Simplified Employee Pension using your self-employed income, these contributions are also tax-deductible.

Lastly, independent contractors are still eligible for other deductions that apply to all taxpayers. These include deductions for student loan interest paid, education expenses, and even moving costs.

4. Use the Right Tools

We’ve already discussed the inherent value of using e-filing software.

But there are other tools at your disposal when it comes to keeping track of expenses and filing independent contractor taxes appropriately.

For example, Quickbooks Self-Employed gives users an easy way to total business mileage, categorize transactions, and send and receive invoices. It will even help users calculate estimated quarterly taxes, which we will discuss in the following step.

If you file your annual taxes through TurboTax’s Self Employed package, you can receive a free subscription to QuickBooks.

Other tools may simply involve a clever Excel spreadsheet that you regularly update. Some independent contractors use credit card statements as a way to categorize and monitor expenses and income, too.

Whatever the case, staying organized is your key to success when filing independent contractor taxes.

5. Understand Quarterly Vs. Annual Tax Payments

If you are an independent contractor at the moment and expect to be such for the coming year, you will have to pay quarterly taxes.

This is often a surprise for most freelancers. Quarterly taxes, however, help freelancers break total tax payments down into manageable chunks.

This ensures that they don’t have to fork over thousands of dollars at once when filing an annual return.

Quarterly payments can be submitted to the IRS using a 1040 form. Deadlines are usually in April, June, September, and January. Individuals can keep track of tax payments through the IRS’s online portal.

These payments are considered estimated payments, based off of your past few months of income and expense history. They are what you have to pay after all eligible deductions are applied.

You do still have to file an annual tax return. However, when you make quarterly payments, your annual tax return may give you a higher refund than anticipated due to your payment history.

6. Report All Sources of Income

As an independent contractor, you do have to report all viable sources of income to the IRS. This includes side projects or additional freelance work that generates income above $600 each year.

You do not have to report income that totals less than $600 a year.

This income is typically detailed in a 1099-MISC form provided by the party you are freelancing for. Leaving out any sources of income can result in an audit.

7. Consult an Accountant When in Doubt

All in all, if you are uncertain about any aspect of filing independent contractor taxes, you can always reach out to the experts. Consulting an accountant can ensure that you don’t miss out on a valuable deduction.

It can also help you minimize overall tax payments. Accountants have industry knowledge that can be an asset to freelancers seeking tax assistance.

Final Thoughts: Independent Contractor Taxes

As a freelancer, you can file your taxes with confidence. To do so, establish a system for keeping track of work-related expenses and eligible deductions.

Always e-file taxes to minimize errors and maximize deduction possibilities. Use the right tools to stay organized. Understand the difference between annual and quarterly taxes.

At the end of the day, you can always consult an accountant if you have any doubt about the filing process.

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