One of the biggest headaches facing anyone that chooses to be an independent contractor is dealing with their taxes. Because you do not work for any company but your own, you are responsible for making sure everything is paid on time and, in turn, things could get a little hectic as April 15th draws near. If you keep these simple things in mind, however, you will be able to get your taxes taken care of with little to no hassle.
By following a few prudent tips, you can minimize the hassle of tax preparation leaving you more time to pursue your business and career aspirations:
- Determine If You Are Self Employed
The IRS has established three categories that determine whether workers are independent contractors or employees: behavioral, financial and nature of relationship. In general, if you provide services for more than one client, choose when and where you work and cover your own costs for equipment you are an independent contractor. If that isn’t the case for you, perhaps you are not truly self-employed. Some companies misclassify workers as contractors to avoid providing benefits and to dodge other obligations.
- File and pay estimates every quarter of the year
This is a commonly known requirement when it comes to being an independent worker. Many self-employed individuals and businesses have to pay estimates every three months of the calendar year to avoid penalties. Whether you are required to or not, it is smart to do this not only to avoid underpayment penalties but as a way to stay organized and on top of your taxes.
- Adjust Exemptions from Wage Income to Reduce Quarterly Payments
Making quarterly estimated income tax payments is one of the more strenuous chores imposed on self-employed workers. But if you work for an employer either part-time or fulitime while working for yourself, you can reduce the amount of your quarterly income tax payments. If done right, you might be able to nix this chore altogether. Adjust your exemptions so that sufficient taxes are deducted from your wages to cover what you would otherwise pay in estimated installments.
- Consult Your Prior Year’s Tax Return for Guidance
Failure to pay enough in quarterly estimated payments can result in significant tax penalties. Your previous year’s tax returns can help you generate an estimate for what you should pay in quarterly estimated installments.
There is no underpayment penalty if your unpaid tax obligation totals $1,000 after your estimated payments are accounted for. There’s also no penalty if your estimated payments total at least 90 percent of your current year’s tax obligations or 100 percent of your previous year’s tax obligations, whichever is smaller.
- Don’t Forget Local Taxes and Fees
Many municipalities impose taxes and licensing fees on self-employed workers and business owners. This is especially likely if your business generates foot traffic or if you provide tangible goods to your clients. Check out local municipal and county ordinances to avoid missing critical payments.
- Consider Whether Incorporating Your Business Makes Sense
For many entrepreneurs, operating as sole proprietors is the most viable option for conducting business. Sole proprietors file regular Form 1040 income taxes, reporting their business expenses on Schedule C as an attachment. But corporations are taxed at a lower rate than individuals, and they enjoy separate legal status. This would shield your personal assets against adverse legal and financial consequences related to business activities. On the other hand, forming a corporation or limited liability company (LLC) is more complex and expensive than operating as a sole proprietorship.
Consulting with a Professional Tax Advisor can help you make the right determination for your business.
- Maintain Accurate Records for Business-Related Expenditures
The equipment and supplies that you purchase for your business represent legitimate tax deductions. Business-related travel and entertainment, plus business use of your vehicle and home office also represent legitimate tax write-offs. But you must be able to document your expenses by retaining your receipts and maintaining accurate business and financial records.
- Don’t Be Spooked by Audit Fears
You may have read or heard that certain deductions such as the home office deduction represent red flags for the IRS that trigger audits. As a result, you may shy away from claiming such tax credits and deductions. While the wish to avoid an audit is understandable, it is foolish to forego legitimate tax deductions and credits, as long as you can verify your claim, you have nothing to worry about.
- Claim Health Insurance Deductions and Credits
Under the Affordable Care Act, individuals and households with incomes between 100 percent and 400 percent of the federal poverty rate are eligible to get tax credits when they buy eligible individual health insurance coverage through state or federal exchanges. These credits can be applied directly to insurance premiums if claimed when filing federal income tax returns. Self-employed individuals may also deduct 100 percent of the premiums that they pay for health insurance coverage for themselves, their spouses and dependents.
One of the these following conditions must apply:
1. You have net profit on Schedule C or Schedule F for Form 1040
2. You recorded net earnings from a partnership on Schedule K-i for Form 1065
3. You figured net self-employment earnings on Schedule SE by an alternate method
4. You have a W-2 for an S corporation where you hold more than 2 percent shares
- Don’t Neglect Depreciation
If your business invests in expensive equipment, depreciation can represent a significant area for tax breaks. The IRS allows you to write off part of the value of big ticket items like photocopy machines or a new laptop each year to amortize the upfront costs of such major tools.
- Need Help? Tax Preparation Costs are Tax Deductible
Many self-employed individuals outsource their tax preparation tasks to an accountant. If you are among that number, you may be able to deduct the cost of tax preparation as a business expense. Our Tax Professional Associates can relieve you of the burden of preparing your tax returns, along with answering your tax-related questions.
If you’ve been around the “self-employment tax” block a few times, you probably recall telling yourself that next year, you’ll do better. You’ll save all the receipts, track all the mileage, put away money for retirement. Well, next year is right now. Check out these mid-year tax strategies for more ways to prepare for next year’s tax season.
- Find missed opportunities
Professionals and business owners need to be focusing on tax planning all year long to avoid missed opportunities and to capitalize on scores of perfectly legal opportunities to lower their taxes. Never make important financial decisions without at least considering the tax consequences. Savvy owners factor taxes into their planning throughout the year and stay on top of continual tax law changes.
COMPLIANCE - REPORTING CASH DEPOSITS
It is important for small businesses to understand that the federal government is cracking down on business owners who try to evade reporting requirements.
At one time, it was possible for small business owners to increase their income by operating small, cash-only enterprises. They skirted the IRS reporting requirement for large bank deposits by making frequent deposits of less than $10,000 each. No longer.
The tactic is called structuring and it is strictly illegal, and the government has a powerful new weapon to prevent it. The law now allows the government to seize bank accounts merely on suspicion of wrongdoing — and frequent, small deposits arouse scrutiny. Family-owned businesses and even individuals saving for their children’s college education can be targeted.
An October 2014 article in The New York Times includes several points concerning the new law that all citizens — not just business owners — should be aware of:
• Making small bank deposits, even frequently, is perfectly legal. It is the attempt to skirt tax reporting requirements that is against the law. However, it is up to the individual to prove that he or she has done nothing wrong.
• A bank statement is all that is needed for banks to file suspicious activity reports. Last year banks filed more than 700,000 such reports.
• Fighting bank account seizure in the courts can require individuals to accrue legal costs of $20,000 or more. Many middle class individuals simply cannot afford that sum — and simply give up, even when they are totally innocent.
It is still important to use bank accounts to obtain FDIC protection. However, to avoid being caught by an accusation of structuring, middle income earners should adhere strictly to the law:
• Always make deposits of at least $10,000 so that the bank will have to file the necessary reporting paperwork with the IRS.
• Collect smaller amounts of money in a safety deposit box until you have accumulated enough cash to make a deposit that will trigger the reporting requirement
• By adhering to the law, you may be saving your business or your financial future.
The IRS recently reported that it is scaling back on future seizures, focusing on cases where there seems to be a clear indication of illegal structuring rather than on ordinary individuals. Nonetheless, it’s better to play it safe. Avoiding even the appearance of structuring is well worth the increased taxes you pay on large bank deposits. Page 5 of 5
WHY TAX PLANNING CAN HELP
• You keep thousands more each year to invest in your business, grow your bank or do anything you wish.
• You get piece of mind knowing you are taking advantage of the opportunity to save on your taxes.
• Planning is proactive rather than reactive, you get to use the laws to your benefit rather than being forced to simply comply with them.
FINAL TIP — call to schedule an appointment with one of our Professional Tax Advisors if you have any questions or concerns regarding these Tax Preparation Tips or need more tax help.
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Are you doing all you can to keep the money you earn? While there are many tax reduction opportunities available for the best strategies, contact the best Proactive dedicated team of Professional Tax Advisors by calling the number listed below.
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IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including attachments, enclosures, or other accompanying materials) was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it address