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.