Common Independent Contractor Tax Mistakes

 

Uber Driver/freeimages
Uber Driver/freeimages

The gig economy is alive and well. There are an estimated 53 million independent contractors/freelancers in the US. Whether you are driving for Uber, dog-walking, bar tending or writing code on your own, self-employment has its perks. Greater flexibility, better work-life balance, no office drama, and the opportunity to save on commuting costs by working from home.

With perks come pitfalls, and if you’re an independent contractor, it’s important to be aware of some of the most common errors  and to avoid them altogether.

Neglecting to Calculate Your Estimated Taxes

Your estimated taxes will be based on your prior year’s earnings. The IRS has issued a handy guide on completing the 1040 ES form. You’ll need to do this each quarter to avoid a hefty tax bill at the end of the year. Even if you do owe at the end of the year, you can arrange for an installment plan under certain circumstances.

The IRS can grant some leeway, but it’s vital to stay on top of those estimated taxes and to pay them each quarter to avoid a nasty surprise at the end of the year.

Failing to Declare Your Independent Contractor (IC) Status

Let’s suppose you agree to do some graphic design work for a local surf/skate shop. In some cases, the client will present you with a contract. If not, it is important for you to draw up a contract that clearly states your employment status. Regardless of who issues the contract, make sure your role is clearly specified as an Independent Contractor.

Your copy of the contract serves as proof to the IRS should they ever question your employment status. In some cases, if you can’t provide a copy of a contract clearly specifying your role, the IRS has the option of re-classifying you as an employee. In doing so, you could lose out on some valuable business-related deductions.

Missing Out on Deductions

You not only need to be responsible for your own Social Security and Medicare taxes, you’ll need to keep track of any business-related expenses. Let’s suppose that graphic design gig requires you to travel back and forth to meet with  your client. Keep any and all receipts related to those trips, including fuel receipts, supplies, food,  and any other expenses directly related to that trip. Mark each receipt with the name of your client and the purpose of the receipt “Gas for trip to Bolt Surf & Skate. Client meeting” and tuck it away with the rest of your records. Keep a mileage log with all of your business-related miles documented.

Same goes for home office expenses. If you work primarily from home, you can claim the home office deduction. Despite horror stories about a higher audit rate for home-based employees, don’t let that scare you. Keep each and every receipt tied to home office expense including phone/utility bills, internet, supplies, software, office furniture and anything else you will need to maintain your home office. Document everything carefully and honestly, and you will have nothing to fear should the IRS come calling.

Misusing Payroll Deposit Funds

If you run a small business and have employees, you’ll need to set aside for federal taxes every pay period. Set the funds aside and don’t use them for any other purpose. It may be tempting for a struggling business or if off-season profits are low, but avoid falling into that bad habit. You could end up unable to replenish those funds when the time comes.

If you are unable to meet your quarterly payroll tax obligation, the IRS has the right to legally close your business until they receive payment. The best course of action is to seek funding from a source other than your payroll tax funds.

Filing Late Tax Returns

Its easy to get buried under what seems like mountains of paperwork throughout the year. However, if you file a late return you could end up owing not only any tax due, but interest and penalties.

The best defense against filing a late return is to keep your tax-related paperwork organized and ready to go throughout the year. Use a filing system, productivity app or other means of keeping organized throughout the year. Tax day will be less of a shock to your system since you won’t need to scramble to find important papers; you’ll already have them organized.

Working as an independent contractor can offer greater flexibility, better work-life balance and escape from office drama are just a few perks of working for yourself. At the same time, it’s easy to let some important tax-related matter slide, either from inexperience or feeling overwhelmed. Don’t fall into that trap and instead stay on top of your tax obligations and record-keeping.

If you need help with any business-related tax matters, our qualified tax pros can help. Just click the white “Start Chat” button in the upper right-hand corner of our webpage, and we can schedule you with one of our knowledgeable tax prep pros.

How Do I Report Company Bonuses?

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freeimages.com

That small business you started out of your garage or at your kitchen table has blossomed into a full-scale enterprise, thanks in part to your team of great employees. The salesperson cultivated, nurtured and converted a record number of leads. Your production staff exceeded their performance measurements beyond what they thought was possible. Your Admin. Assistant worked hard to keep you sane and to keep the office running smoothly.

Time to break out the checkbook and to issue some bonuses. Can you deduct those bonuses as an expense on your tax return?

Maybe you’re one of the lucky bonus recipients and are wondering if you need to claim your bonus as income.

Here is a brief run-down of how you need to account for bonuses at tax filing time:

Can You Claim Bonuses As a Business Expense?

Bonuses can be claimed as a business expense if they were given in exchange for services, such as your salesperson exceeding their quota. However, if you distribute the bonuses as a holiday gift at the annual party, you can’t claim the bonus as a business expense.

You must distribute the bonuses within the same tax year in order for you to claim them as an expense on your tax returns (provided they also meet the requirement above).

There is one exception to the tax year rule: if you use the accrual method for paying your taxes, you can claim the bonuses as an expense if they are paid out within the first two and a half months of the new tax year.

Payment To Relatives

If your record-breaking salesperson is also a family member, they will need to report their bonus as income in order for you to claim their bonus as an expense.

If You Are An Employee…

The IRS regards bonuses as “Supplemental Wages.” If you scored a bonus at work, your employer will likely use one of two methods in calculating taxes.

If you received a separate bonus check, your employer will most likely deduct 25% for taxes. This is known as the percentage method.

In come cases, your bonus may have come as part of your regular paycheck, and instead your taxes will be based on the total amount of your paycheck, including the attached bonus. This is known as the aggregate method.

If your bonus is large enough to bump you into the next tax bracket, and if you’re sure you’ll be making less money in the coming tax year, see if your employer would be willing to defer your bonus. He or she may not want to do that, but it won’t hurt to ask in the meantime.

Giving and receiving bonuses can be rewarding (especially for the employee) and they provide recognition for a job well done. However, there can be some tax headaches for both employer and employee, so it’s helpful to be familiar with the tax regulations on both sides of the equation.

Bonuses can be claimed as a business expense under certain limitations, and employees will have to claim the bonus as income. If both parties stay current on tax regulations regarding bonuses, tax time will be relatively pain-free.

 

Unemployed: Tax Tips For Job Loss

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freeimages.com

It’s no secret that job loss is one of the most stressful life events you’ll experience. You deal with thoughts such as “How will I pay my bills? What about insurance? Will I get another job soon? Can I get Unemployment Insurance?” as the reality of your job loss sinks in.

Losing a job, either through termination or layoff hits hard on all fronts. You might also end up taking a hit on the tax front if you’re not familiar with how unemployment affects your tax scenario. Here are a two instances in which unemployment can alter your tax status.

Unemployment Insurance

The IRS considers Unemployment Insurance (UI) fully taxable income. In some cases (options vary from state to state) you can elect to have taxes deducted at the time you file your claim, and then again once you fill out your continuing claim form.

Either way, you’re going to be hit with taxes, either up front when they are deducted from each UI check (if you’ve elected this option) or at the end of the year when you file your taxes.

Think carefully and consider each option. Whether or not you have access to any other income ( e.g. severance pay, investments, child support.) and how cash-strapped you are will influence which option you select.

When in doubt, talk it over with a tax advisor who can assess your tax situation and current circumstances.

If unemployment has left you in the lurch financially, check with your local United Way 211 referral service. They may be able to refer you to low-cost or no-cost year-round tax services.

Otherwise, if you have the means it would be a good idea to meet with a tax advisor who can help you to fully  assess your options.

IRA Distributions

You won’t know for weeks whether or not you qualify for unemployment, and it could a few more weeks before you see that first UI check or deposit if you do qualify. Meanwhile, your IRA is there, ripe for the picking. After all, bills are due and the landlord or mortgage company is getting restless.

You guessed it. There’s a tax hit for withdrawing funds from your IRA if you’re younger than 59 1/2. A 10 percent tax hit up front, and then an additional 20 percent hit if your IRA is tax-deferred (no taxes were deducted at the time of contribution).

There may be a way around those tax hits at the same time: the Qualifying Reason clause. Generally, the IRS won’t tax your early IRA distribution if you can demonstrate one of these scenarios:

  • The funds were withdrawn for college expenses for yourself, a child, spouse or grandchild
  • If you need to cover the expense of a sudden disability
  • If you have medical expenses that are not covered by insurance and that exceed 7.5 percent of your Adjusted Gross Income (AGI)
  • First-time home purchase (can withdraw up to $10,000 tax-free)

Remember, the IRS will require supporting documentation for any of the above circumstances so keep any related receipts and records.

Sudden job loss can wreck havoc on your finances and well-being. By knowing your tax options up front, you will be able to make an informed decision regarding the best options for you.

If you’ve been hit with a layoff or job loss and are struggling to pay your tax bills, we can help. Just click the white “Start Chat” button at the top right-hand corner of any of your pages, and you’ll be put in touch with one of our qualified tax pros. Job loss is stressful enough; don’t let a looming tax bill add to your stress.