Of all the many changes that occurred in the business world over the last several years, the increase of independent contractors, freelancers and consultants was significant. As businesses everywhere faced downsizing and layoffs, professionals began to see that working independently was really one of their very few options.
There are some nice advantages to working as an independent contractor. It allows an individual freedom to choose what work they want to engage in and how often. They essentially become their own boss, relying on their own skills and knowledge for success.
However, there are also important risks and new responsibilities involved in being a contractor. These risks and responsibilities have the ability to end a contractor’s career quickly if you do not consider them carefully.
Some of the biggest differences between working for a company and working for yourself has to do with taxes, how you plan them and how you track them. There are guidelines and tips available to help you, but it still requires attention to detail.
Here are 4 things you should know about becoming a contractor that involve taxes:
1. You are now responsible for paying your own taxes.
As an independent contractor, you no longer have a company accountant making sure that the right amount of taxes are coming out of your paycheck each payday. For some independent contractors, this can be one of the biggest adjustments they have to deal with. It is a requirement for contractors to pay both federal taxes on income and FICA. The clients you work with are not withholding taxes for you. Instead of paying taxes just once a year, it is a requirement to pay taxes you estimate throughout the year. This is an important change to pay attention to.
2. You must become aware of and understand expenses and deductions.
It may take some time to get really good at learning this part of the business, but it is definitely worth it. As an independent contractor, most of your business costs come straight out of your own wallet. Understanding which of those costs can be considered a business expense is crucial to keeping your business afloat.
3. Your clients need to classify you as an independent contractor.
This is more than just calling yourself an independent contractor. There are actual legal requirements that differentiate and classify workers as either employees or independent contractors. Contractors are not entitled to the same rights as employees, such as overtime, worker’s compensation, and employee benefits. A misclassification by a client can lead to major tax issues down the road.
4. You are on your own when it comes to retirement.
When it comes to retirement plans, there are no longer companies matching 401K plans or guaranteeing pensions you earn as you go. Your retirement accounts and strategies are all on you. It becomes your job to responsibly decide how much of the money you earn goes into savings and what type of savings.
Fortunately, there are people to help. At Hacker Accounting, we have helped many independent contractors with their taxes, from estimating their earnings to filing taxes at the appropriate times. If you have specific questions about how to handle taxes as an independent contractor, feel free to give us a call at 602-375-5251.