There are certainly benefits to being an independent contractor. Being able to set your own schedule, to have the flexibility to pursue different projects and work with different clients and organizations: It can afford you a tremendous amount of freedom. It can also make tax season the most stressful time of the year. While most people are filing for one source of income, you could be filing for dozens!
At Hacker Accounting, we know how tricky it can be to file as an independent contractor. Here are some of our best tax tips for independent contractors.
Report All Your Income
Contractors usually get a 1099-MISC form detailing their earnings from their freelance work. Sometimes you’ll do a job where you won’t get such a form. That’s often because the payment issued was less than $600. $600 is the trigger that requires an employer to issue documentation to you and the I.R.S.
Just because the IRS doesn’t get a copy of your income on these smaller jobs doesn’t mean that you should leave them off your tax return. That’s still taxable income that you HAVE to report.
Keep Detailed Records
Be meticulous and thorough with your record-keeping. An independent contractor is eligible for tax deductions related to the cost of doing their work. In order to take these deductions, though, you’ll need proof of your expenses. Put in place a filing system so you can keep track of all receipts for equipment, supplies, and services needed to do your work. If traveling is a part of your work, track your mileage, car, hotel, and meal costs.
Be Careful With Deductions
One of the biggest red flags that the IRS uses for auditing is too many deductions. Make sure that everything you’re writing off is a legitimate work expense. Having detailed records isn’t enough: You also need to be sure you can prove that the things you’re writing off are being used for work purposes. If you write off something that you use on your “down-time”, that could be grounds for an audit or tax penalty. For example: Trying to write off an Armani suit because you bought it and wore it to one business consultant meeting could get you into some hot water with auditors.
Pick The Right Filing Status
As an independent contractor, odds are you’ll end up filing Schedule C as part of your annual Form 1040 return. But there are occasions where you can qualify for filing under Schedule C-EZ. You can use Schedule C-EZ if you:
- Have business expenses of $5,000 or less.
- Use a cash method of accounting.
- Don’t have any inventory at any time during the year.
- Never hire an employee.
- Do not depreciate any business property.
- Don’t claim expenses for business use of your home.
- Don’t carry over passive activity losses from an earlier tax year.
Related: Top 7 Tax Breaks for Parents
Want More Tax Tips For Independent Contractors?
Want more tax tips for independent contractors? Need help figuring out your taxes? Give Hacker Accounting a call at 602-375-5251.