Six Tax Tips All Independent Contractors Must Know
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Let’s get something straight. The fact that you are getting a 1099-MISC to report your earnings to the IRS means you are in business for yourself. You need to take full responsibility and treat your business as a business—and do the normal things a business does when filing taxes.
Here are a few ways you can start acting like a business and mitigate issues with the IRS.
1. Stop giving out your Social Security number and get an Employer ID (EIN) number. This accomplishes two things: It protects you from identity theft, and it shows the IRS that you are a business.
2. Open a business bank account, using your new EIN, to separate your personal finances from your business finances. If you ever get audited, this step will make it easier to prove your business expenses to the IRS.
3. Keep books. If you don’t know how to keep your books, it’s time to either learn or hire a competent bookkeeper. Being able to read and understand your business’s financial statements will help you cut costs, get loans, understand when to raise prices, and help you with tax planning.
4. Select accounting software that’s appropriate for your business—don’t just use something that doesn’t really meet your needs just because it’s free. These days, there are sophisticated choices that can not only track your bookkeeping needs but also help you create a business website. Many types of software will track your inventory and sales; keep track of billing; keep records of your sales taxes by state; place your products into online sales forums; and give you access to your records from anywhere.
5. Do some tax planning. Read a book on small business taxes (like mine, Small Business Taxes Made Easy, or another one of your choosing) to learn how about tax benefits available to business owners of all kinds. There are lots of ways to get tax benefits for your family’s medical expenses, retirement plans, childcare, and more, but you can’t get them if you don’t know about them.
6. Pay your estimated taxes. After you have the numbers and know what they mean, and once you have reduced your profits by taking advantage of tax planning, you can determine your quarterly profits.
Remember: Even if your overall taxable income is a loss, you may owe taxes because your Schedule C had a profit. You’ll be paying 15.3 percent as self-employment taxes (Social Security and Medicare) on those profits.
These are easy steps to take. If you use this as a checklist, you’ll cut your taxes, reduce your audit risk, and increase your profits. All good things for the independent contractor!
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.
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