Each year, more and more Americans eschew traditional employment in favor of working as an independent contractor. Last year 34 percent of working Americans were freelancers, and that number is expected to reach 40 percent by 2020. For many, this shift means greater financial independence and flexibility. However, it also brings a whole new set of expectations when it comes to filing taxes.
If you currently freelance or are considering becoming an independent contractor in the near future, there are some things you should be aware of. Here are five things every contractor should ask their accountant.
What forms do I need to file my taxes?
You should complete a Form W-9 at the beginning of your relationship with each client. This gives the business or client your correct taxpayer identification number, which they use to indicate to whom payments are made.
Filing is easiest when you have a Form 1099-MISC from your client. This is similar to a W2 form, but tracks non-employee costs. While this form makes it much easier to account for your income, clients are not required to send a 1099-MISC unless they paid you $600 or more. However, they may be happy to provide one for you upon request. It never hurts to ask.
What does my client owe me?
As a contractor, you are not owed the same benefits as an employee, and you will not have taxes withheld from your earnings. It is up to you to fund your health insurance, vacation days, and the taxes that would normally be withheld. For this reason, many contractors may choose to charge clients a higher price for their work than they might make as an hourly employee.
What special deadlines do I face as a contractor?
Because you don’t have an employer withholding and paying taxes for you, you’ll need to file quarterly estimated taxes if you expect to owe more than $1,000 in April (this sum is dependent upon your tax bracket). Each quarter has its own payment deadline:
- January 11 to March 31: April 15
- April 1 to May 31: June 15
- June 1 to August 31: September 15
- September 1 to December 31: January 15
When due dates fall on a weekend or holiday, the deadline extends to the next business day.
How much income should I save for taxes?
The tax bracket you will fall under depends on both your taxable income and your filing status. If you are single, you may be in a higher bracket than if you are married and filing jointly. And as your annual income increases, so does your tax rate.
We recommend putting aside a portion of your income to prepare for taxes owed in April — no one wants to owe hundreds or thousands of dollars and not have money saved for it. If you make $90,000 per year or less, you should be fine putting aside 25 percent of your income for taxes, though you likely won’t owe that entire amount. If you make $189,000 or less, you should save about 28 percent.
Moneychimp has a handy tax bracket calculator that we like to use for a general idea, but for a more exact amount, you should talk to your accountant.
What if my client refuses to pay me?
Unfortunately this can be one of the most problematic areas for independent contractors. The best way to safeguard against this is to have every client sign a contract that clearly delineates the work to complete and completion date, as well as the expecting payment amount and date. If the client refuses to sign the contract, that is a major red flag (click here for more red flags to look out for).
If they have signed and still refuse to pay, you still have some avenues for payment recovery. Phone calls are a good start. They are harder to ignore than emails and can be an easy way quickly to clear up confusion as to the actual date and payment amounts. If phone calls are insufficient, you may need to pursue the issue through small claims court or professional debt collection.
We work with dozens of independent contractors to ensure that they are fully prepared for the financial situations that may arise. For more tips on handling finances as a contractor, give us a call at 602-375-5251.