Getting Extra Tax Guidance
If youre still unsure about creating the freelancer-employer working relationship, help is available. An experienced employment lawyer can answer all of your questions and help you draft independent contractor agreements, which are best suited for your situation.
Post a project in ContractsCounsels marketplace to get flat fee proposals from top-rated lawyers for your legal project. All lawyers in our marketplace are vetted by our team and peer-reviewed by our customers for you to explore before hiring.
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Open A Retirement Plan To Shelter Your Business Profit
The most common self-employed retirement plan is a Simplified Employee Pension plan . You can put in up to 25 percent of your net earnings from self-employment, which is your net Schedule C profit minus the deduction for one-half of your self-employment tax. The maximum annual contribution for 2021 is $58,000.
Compare that to the $6,000 cap on IRA contributions for 2021. A SEP can be established for 2021 as late as April 18, 2022, or if you filed an extension, October 15, 2021.
Keep Track Of Your Paperwork
Understanding how self-employed taxes work, staying organized, and keeping track of your payment history can vastly streamline the tax filing process. For example, if youâre a seasoned independent contractor, being able to refer to your income records for the past few years will make it much easier to estimate your average annual income as well as your taxes owed.
There are also numerous self-employed tax deductions available, so be sure to save receipts and keep detailed records of things like business travel, transportation expenses, and insurance costs to take advantage of deductions for these expenses.
Set aside a little time once a week to categorize receipts, document expenses, and file any tax-related paperwork or documents. Getting in the habit of this process will help to ease the burden of quarterly and annual filing and ensure you donât overlook deduction opportunities.
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What Should You Look For In A Tax Software Program
“Freelancer” is synonymous with “self-employed business owner” in the eyes of the IRS “), so you’ll be reporting your business income and expenses on a Schedule C and your self-employment tax on a Schedule SE include both with your Form 1040, the standard individual tax filing form. The tax software you use will definitely need to support that paperwork along with Form 1099-NEC, the non-employee income document you get from your clients instead of a W-2. You may also receive a Form 1099-K from a third-party payment network like Venmo or PayPal if your client paid you at least $600 that way.
Other good-to-have features include:
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An intuitive e-filing process with straightforward questions and prompts
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Some sort of accuracy and maximum refund guarantees
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Solid customer support, with optional access to a real live tax expert in case of emergency
Dont forget that youll also need to file your state taxes in addition to your federal taxes see Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). Some tax software providers will include one state for free, but most will charge you per state where you need to file.
How Do You File A Tax Extension
If you dont have your tax paperwork done in time, you can request a tax-filing extension online for free. However, note that this extension grants you more time to file, not extra time to pay taxes. In other words, you still have to pay your taxes on timeyoure just delaying the paperwork by a few months.
The easiest way to get an extension is by paying your estimated taxes using the IRSs online payment portal. Just look for the extension tab while moving through the portal. Tax extensions bump your paperwork-filing deadline back six months. If you apply for an extension, expect to have your paperwork in order no later than October 15, 2021.
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Understand Your Independent Contractor Deductions And Credits
As an independent contractor, you can use certain deductions and credits that can help reduce your net income, thereby reducing the amount of tax you pay.
The most frequently used deductions include:
- Car and mileage: when you use your personal vehicle for business purposes
- Home office expense: where you use part of your home to conduct most of your business
- Business supplies
- Health insurance premiums: where other health insurance plans dont cover such payments
- Cellphone charges for business use
- Continuing professional/business education
- Postage
- Professional membership dues and subscription fees
Some of these deductions may not apply to you. Additionally, you may be able to claim or write-off other expenses against business income. Consult the latest IRS guidelines on applicable deductions before filing.
Set Up The Right Bank Accounts
Maintaining a separate bank account will help you keep business and personal expenses separate. This also helps with the record keeping part of things. While youâre at the bank, set up a separate savings account too. Itâll make it even easier to transfer your 25 to 30 cents for every dollar you earn to pay for taxes.
Read Also: How Soon Can You File Taxes 2021
Tax Support For Independent Contractors
We hope this information gave you a foundation for knowing how to file your taxes. However, from big businesses to small businesses to independent contractors, we understand that the tax process is intimidating.
For this reason, Hart Accounting Services is ready to help you with your tax filing needs. Well recommend how much you should pay in quarterly estimated taxes and make sure you comply with all CRA regulations so you dont have to worry about unexpected fines.
Taxes dont wait, so neither should you. Contact us today and learn about the outstanding service we offer to our independent contractor clients.
At Hart Accounting Services, we offer a complete range of tax and accounting solutions to cater to the needs of all business types and sizes. Outsourcing your businesss accounting will not only ensure regulatory compliance and accurate performance tracking, but it will free up your time and resources to carry out your business operations.
What Is Flsa Classification And Where Did It Come From
FLSA stands for Fair Labor Standards Act, and the requirements have actually been around since 1938. The FLSA has gone through some changes since then, but its main purpose is to ensure that employees get paid fairly for their work, whether thats setting the minimum wage at a federal level, or establishing the 40-hour workweek.
The process of FLSA classification is usually concerned with deciding whether you need to pay overtime or not, and thats where well focus our discussion.
If your employees are covered by FLSA, and they are nonexempt, they will be entitled to overtime pay. This is time and a half of their regular pay for every hour they worked over the standard 40-hour working week in a seven-day period.
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Exploring The Many Types Of 1099s
A 1099 form reports certain types of income that a taxpayer has earned throughout the year. Whether it’s cash dividends paid for owning a stock or interest income earned from a bank account, a 1099 may be issued.
A 1099 is essential since it records non-employment income earned by a taxpayer. And there are many types of 1099 forms since there are various ways to earn non-employment income. For example, as of the 2020 tax year, independent contractors and freelancers who earned $600 or more in non-employment income should receive a 1099-NEC.
Although taxpayers may not like receiving tax documents, such as 1099s, and businesses probably like issuing them even less, 1099s are essential since they keep track of income that isn’t recorded in a person’s wages or salary. The Internal Revenue Service matches nearly all 1099s and W-2 forms against your Form 1040 or other tax forms. If they don’t match, it sends out a CP2000 notice to taxpayers, saying they owe more money.
Here are 10 things you should know about 1099s, including a review of the various types and what to do if you don’t receive your 1099 or it’s inaccurate.
A Beginners Guide To Independent Contractor Taxes
by Ryan Lasker | Published on May 18, 2022
Independent contractors play a significant role in the U.S. economy, at least for now. From your cab driver to your food delivery person, you interface with independent contractors every day. You might even be an independent contractor. Even Im an independent contractor!
Unlike employees, independent contractors remit tax payments on their own. Ill say that at least two more times in this article because its just that important. Heres how you pay taxes as an independent contractor.
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How To Take Advantage Of Tax Deductions
Sadly, itâs illegal to skip paying taxes outright. However, there are ways you can minimize how much of your self-employment income goes to the IRS.
Thatâs where deductions come in handy. When you spend money on certain business expenses the IRS will reduces your tax liability.
Your tax deductions are reported on Schedule C of Form 1040, which you use to report your personal income. Form 1040 is filed at the end of the year, with your final quarterly estimated tax payment.
Further reading:
How Are Taxes Calculated For Independent Contractors
To calculate their quarterly taxes, independent contractors must estimate their adjusted gross income, taxable income, taxes, deductions and credits. Its often helpful to use the previous years federal tax return as a guide.
This article is intended to be used as a starting point in analyzing independent contractor taxes and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
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Do I Have To Pay Taxes On A 1099 Form
Typically, income that has been reported on a 1099 is taxable. However, there are many exceptions and offsets that reduce taxable income. For example, let’s say a taxpayer has a gain from the sale of a home, meaning the selling price was higher than the original cost basis. The taxpayer might not owe taxes on that gain since they may qualify for an exclusion of up to $250,000, depending on their tax situation. It’s best to consult a tax professional if you’re unsure whether you need to pay taxes on your 1099 income.
What Tax Do I Pay As A Contractor
People who work for themselves are responsible for both state and federal income taxes, as well as self-employment tax. This tax is made up of your federal Social Security tax and your federal Medicare tax , for a combined self-employment tax rate of 15.3 percent of your net company revenue.
As a freelancer, you are responsible for both the percentage of FICA that you would ordinarily pay as an employee and the portion of FICA that your employer would match if you worked for someone else. Schedule SE of Form 1040 is used to file your self-employment tax return.
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Determining Your Employment Status For Taxes:
The first thing you should determine is if youre considered a self-employed taxpayer or not you likely get paid as an independent contractor rather than an employee. Credit Karma reminds us that as an independent contractor, youre automatically considered self-employed by IRS standards. This is because as a business owner or contractor who provides services to other businesses, you arent an employee of any company.
Not all self-employed business owners are independent contractors. If youre not sure whether a company you work with considers you an independent contractor, read over your contract or reach out and ask.
If youre a self-employed individual, youre subject to a different set of tax payment and filing rules than employees including additional forms to file and estimated taxes. Failing to pay your estimated quarterly taxes or underpaying them may result in a tax penalty, and the size of the penalty depends on how much you underpaid.
What Is An Independent Contractor According To The Irs
Independent contractor is the term used by the IRS to designate a type of worker who contracts their services to a business. They are more like business partners or vendors than actual employees. Independent contractors don’t receive company benefits, and you don’t need to withhold payroll taxes from their compensation.
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What Is Tax Software
Tax software is a type of software program thats designed to guide users through the process of preparing and filing their returns, helping them comply with tax laws while identifying any deductions and credits that may be available. Essentially, its software that makes it less taxing to do your own taxes.
Back in the day, tax software came in the form of a CD-ROM that could be downloaded to your desktop computer. Nowadays, you can just download a program from a trusted tax prep companys website. Or, even better, some tax preparation tools are available completely online or via mobile app for maximum convenience.
Will I Have To Pay Someone Else To Do My Taxes
You might be able to use one of these online business tax preparation services if you have a simple business tax return, with no employees or product inventory.
However, if you choose to do the work yourself, or just want to better manage your business in general, here are some of the best accounting apps for your bookkeeping and tax calculation needs.
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Voluntary Classification Settlement Program
The Voluntary Classification Settlement Program PDF is an optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements.Apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, in order to enter into a closing agreement with the IRS.
Example Of Independent Contractor Taxes
Weve covered a lot of ground, so lets take a look at an example to try to clarify it all.
Bill Shakespeare is a freelance writer who wrote four plays for four different theater companies in 2021. At the end of the year, each of the theater companies sent Bill a 1099-NEC form that listed how much they paid him for his work. The total is $80,000. Hey, who says artists have to starve?
Bill will include all the income he earned on Part I of Schedule C. So thats pretty simple: $80,000.
In Part II, hell subtract or deduct all of his business expenses from his income. Lets say his home office takes up 20% of the space in his home. That means he can deduct 20% of his mortgage, insurance and utilities. Well keep it simple and say that equals $3,500.
And then he bought a $2,000 laptop and spent $5,000 traveling to the theater companies. That comes to a grand total of $10,500 in expenses.
Income expenses = profit, so in Bills case, $80,000 – $10,500 = $69,500 in profit.
Bills next step is to take his net profit and plug it into Schedule SE to figure out how much he owes in self-employment taxes. Remember, the self-employment tax is 15.3%, so that means Bill will owe $10,633.50. The IRS gives you a little break on your self-employment taxesthey let you deduct the portion your employer wouldve paid. So that will knock down Bills tax bill a bit.
After that, Bill will move on to the 1040 tax form and begin the process of figuring out the rest of his income taxes.
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Taking Advantage Of Tax Deductions
Tax deductions, which are commonly called write-offs, offer independent contractors the ability to remove expenses from their taxable income. One of the requirements for being classified as an independent contractor is that youre responsible for purchasing all materials, software, etc., in order to run your contracting business.
When preparing your tax deductions, youll need to list them on your T2125 form. Well show you examples of the items that you can legally write off, but remember that they must always apply to your independent contractor work with the purpose of helping you maintain your business or increase profit. In fact, youll need to show proof that you purchased the items via sending the CRA receipts, invoices, or other documents confirming your purchases.
Below are examples of categories that you can use to write off your independent contractor business expenses.
Operation: Any items that are at the core of running your business. Examples include rental space, office supplies, payroll, repairs, and utilities. If you work from home, you can deduct your home office space. That said, you must be cautious when writing off a portion of your home, so its best to contact an experienced CPA for guidance, such as those we have at Hart Accounting Services.
The cost of websites, software thatll help you run your business, and any other advertising or marketing expense that you have all qualify for tax deductions.
