Independent Contractor Tax Tips
Working with independent contractors is one of our specialties. Tax Help Center works with independent contractors throughout the year to minimize their tax liabilities and get them, then keep them in compliance. Here are a few tax tips for those of you who are independent contractors. As usual, feel free to give us a call at (404) 600-1040 to schedule your free tax consultation.
Verify Independent Contractor Status
Don’t assume that because the company classifies you as an independent contractor or reports your income on form 1099 that you are actually a contract worker. The IRS has its own definition of contractor that not all companies adhere too. According to the IRS, a business can only control the or direct the result of the work done by an independent contractor, but not methods of accomplishing the result. In essence, a company can tell a contract worker what they want done, but not how to do it. It is important to verify your status because if you take tax deductions afforded a contract worker, but the IRS doesn’t view your position as contract work, you can be liable to pay taxes and penalties.
Keep Records of Expenses
As an independent contractor you are eligible for tax deductions related to the cost of doing work. However to take these deductions you need proof of your expenses. Develop a filing system to track all receipts for equipment and supplies, and services need to do your work. If your work requires traveling, keep track of your mileage and car expenses, as well as hotel and meal costs.
The IRS allows independent contractors to deduct indirect and direct expenses related to work. Indirect expenses are not directly related to the job, but are incurred as part of doing the jobs, such as utilities. Direct expenses are costs that are directly related to doing work, such as phone services, postage, supplies and other necessary work items or services. Home-based contract workers are allowed to take the home office deduction if the primary location for the work is done at home. If travel is also a part of doing your work, keep track of mileage, hotel and other travel-related expenses. Other possible deductions include health care insurance costs, retirement savings accounts and professional service fees, such as lawyers or accountants.
Pay Quarterly Taxes
Traditional employers deduct and pay employee taxes to the IRS monthly, but not for independent contractors. As a result independent contractors must pay taxes on a quarterly basis–April, June, September and January–if their tax liability will be more than $1,000 during the year. The easiest way to do this is save a portion of each payment you receive for contract work in a separate tax account.
Pay Self-Employment Taxes
Independent contractors are responsible for paying their own self-employment tax, which includes Social Security and Medicare. Self-employment tax is paid only at the yearly tax filing done in April using the Self-Employment tax form. One benefit is that half of the self-employment expense is deductible on Form 1040.