There are numerous ways to save money on taxes for independent contractors. This guide lists 9 tips for filing taxes as an independent contractor.
Nothing is as impressive as being your boss.
When you are an independent contractor, the world is truly your oyster. You can work on various projects that interest you, and clients seek you out for your specialized work.
However, when tax season rolls around, it can sometimes be a pain filing taxes as an independent contractor. Since your tax deduction is not the same as having an employer take from an employee, instead, it is up to the independent contractor to do the guesswork.
Still, there are many ways to save money on taxes when you are an independent contractor. Want to learn more? Then keep on reading for the nine tips for filing taxes as an independent contractor.
1. Know the Difference Between Freelancer and Independent Contractor
Freelance work and being an independent contractor are similar, but also widely different in the eyes of the IRS.
You can have a full-time job elsewhere while making side income; however, if you make more than $600 from who you are working with, then it must be reported to the IRS. If you are not an active employee of the company, then the IRS considers that self-employment income.
2. Save a Quarter of Your Income
It is recommended that you save between 25-30% of your income throughout the tax year; that way, you can balance out what you owe.
Being an independent contractor, you rely mostly on projects and are an outside resource to individuals instead of being on the company payroll.
If you save a quarter of your income per year, you can put that money towards the taxes you owe, saving you the heartache of having to scramble for resources to pay what you owe.
3. Keep Your Documents Organized
When you are an independent contractor, it is imperative to stay organized.
Staying organized means keeping all of your tax documents in place by having a dedicated folder or device that has your tax information, such as forms, expenses, and other deductions or information you can use on your tax filing.
Any sort of receipt, bill payment, tax form, etc. should be kept safe. When it is time for taxes, you will be glad you kept everything neat and tidy.
Keep a record of your expenses, such as travel, supplies, or other products or expenses made for business. Keeping an electronic or paper trail of costs makes it much easier to qualify for deductions.
4. Use the Home Office Write Off
Working from home is easily one of the most significant benefits of being an independent contractor. Additionally, you can use this space as a write off for your taxes.
To use your home office as a tax write off, first double-check for the IRS rules regarding home office deductions and make sure you qualify. Then, from there, you can implement the home office deduction on your taxes.
5. Use Accounting Software
Having access to accounting software is going to make your life as an independent contractor so much easier.
From simple options like Microsoft Excel to more in-depth software like QuickBooks, making sure your expenses are accounted for and organized can assist you in the tax process while also giving you an idea of how to budget in the future.
6. Know What Documents You Need and How to File
The 1099 form is the most common tax form for independent contractors or those who are self-employed. However, there are other documents you can acquire from being an independent contractor.
These can include filing as an S corp. If you are self-employed, filing as a business can be beneficial, as it can separate your work expenses from your expenses.
There are S corp filing requirements, but as long as you meet the standards, you can begin filing as a business for your independent contractor work.
7. Pay Self-Employment Taxes
Yeah, we know, taxes are not fun.
However, if you pay self-employment taxes, you are responsible for paying for benefits such as social security and medicare. Paying self-employment taxes goes back to reserving a quarter of your income since these taxes are paid once throughout the tax year.
8. Get that Education and Tax Deduction
If you are working and going to school, luckily for you, there is a benefit.
You can receive a tax deduction for continuing education by proving that you are enrolled and actively going to school during your self-employment. Additionally, you can even receive reimbursements for books, supplies, online classes, and other materials purchased for education.
9. Making the Most out of Independent Contractor Deductions
Understanding how to make the most of being an independent contractor is imperative, especially when it comes to taxes.
For example, in addition to the other deductions mentioned, you can also write up tax expenses and business travel.
Understanding the benefits and resources you have can make filing taxes a much more stress-free experience. Since your work and personal life intertwine so often, keep a record of what you use for business.
Your laptop, cell-phone, or other technology that is used for business can play a role in your tax deductions. Moreover, deducting these off of your 1099 form is a clear way to understand how your devices are being used for business purposes.
If you often drive to meet clients or have a lease on your vehicle, these can all be useful in tax deductions for self-employed individuals.
All in all, understanding how deductions work is imperative to make sure you are implementing them properly when filing taxes.
Filing Taxes as an Independent Contractor
Now that you know the nine best tips for filing taxes as an independent contractor, you can now feel confident when tax season rolls around. You have all of the resources you need to file correctly and even get some returns.
Want to learn more about finances as a self-employed individual? Then check out our business services for more information.