While I believe that being good is what will keep your business in business for the long haul, luck in getting a job or two is always welcome.
But you shouldn't rely on luck when it comes to paying taxes on your independent contracting income.
So today's Daily Tax Tip on this St. Patrick's Day combines an Irish symbol of luck, the four-leaf clover, and with some tax advice -- OK, four tax tidbits in keeping with the number of the auspicious plant's leaves -- for contractors.
1. Report all your income
As a contractor, you'll get lots of 1099-MISC forms each year, detailing your earnings from all your separate jobs. But you probably had some jobs where you didn't get a 1099.
The reason for no paperwork is that the payment was less than $600. That's the trigger that requires a payor to issue documentation to you and the Internal Revenue Service.
Since the IRS doesn't get a copy of your income on these smaller-paying jobs, you might be tempted to leave that amount off your tax return.
Don't. You are still required to report all your payments, including those of $599.99 and less.
And you don't really want to test the IRS' income tracking prowess, do you?
2. Pay estimated taxes, including SE
As a self-employed worker, you're responsible for paying the income tax on your earnings throughout the year as estimated taxes.
These payments -- due each April, June, September and January -- cover the pay-as-you-earn requirement that salaried workers have taken care of via income tax withholding.
|On taxable income
|Is due on|
||Jan. 1 through March 31||April 15|
|2||April 1 through May 31||June 15|
|3||June 1 through Aug. 31||Sept. 15|
|4||Sept. 1 through Dec. 31||Jan. 15|
When you figure these four extra tax payments, be sure to include the self-employment tax portion in the 1040-ES amount(s) due.
Self-employment taxes, referred to as SE taxes because that's the name of the tax form, Schedule SE, on which they are reported, go toward Social Security (old-age, survivors, and disability insurance) and Medicare (hospital insurance).
This is the self-employed worker's equivalent to FICA, or Federal Insurance Contributions Act, taxes withheld from paychecks.
If you don't account for it in your estimated tax amounts, you'll pay it when you figure your final return as due tax, along with interest and penalties for underpayment.
3. Keep your receipts
Qualified business expenses will reduce your gross income. And that will lower the amount of tax you owe.
To get to your lowest possible tax bill, you'll need receipts, all of them. And you'll want to hang onto them.
Not only will they help you fill out your tax return, they could be crucial in keeping any work-related tax breaks you claim. Yes, I'm talking about audit possibility.
The IRS is upfront about its special interest in small business filers.
Remember all that non-1099 income? You reported yours, but some other small business people don't. And the IRS also suspects independent contractors of inflating deductions. Complete tax records and receipts will help you assure the IRS that your deductions are valid.So set up a system to keep your receipts and other business-related material. It can be all paper in a filing cabinet or digital or a combination. Regardless it will make filing and, if necessary, defending your tax return much easier.
4. Determine whether to file Schedule C or C-EZ
Most independent contractors file Schedule C as part of their annual Form 1040 return. But smaller enterprises, or even larger ones that have the occassional slow year, might be able to file the easier Schedule C-EZ.
You can use Schedule C-EZ if you:
- Have business expenses of $5,000 or less.
- Use the cash method of accounting.
- Do not have inventory at any time during the year.
- Never hire an employee.
- Do not depreciate any business property.
- Do not claim expenses for business use of your home.
- Do not carry over passive activity losses from an earlier tax year.
So look at what your tax situation is each year. Then choose the form that fits your filing needs.
There are, of course, many more than just four tax considerations for independent contractors and small businesses.You also might find these items of interest: