When you are first in the planning and developing steps of starting your own business or working as an independent contractor, taxes are not always at the top of the list of things to consider. In fact, they probably don’t make the list at all. This is a common mistake that contractors make.
Unfortunately, it’s not the only mistake they typically make. Here is a list of the top 5 mistakes contractors make when doing their own taxes:
1. Filing Taxes Late
Let’s face it, filing taxes is quite a bit of work and takes up precious time that contractors don’t always have. They would rather be focused on what it is they do well, which is growing their business. This often leads many contractors to ignore or put off their taxes until the filing deadline has passed. Missing deadlines can lead to penalties and fines. We suggest that you get started on your taxes as soon as possible.
2. Missing Out on Deductions
There are tax deductions that independent contractors are entitled to. Because they are not always familiar with these deductions or they don’t know about them, they often miss out, which definitely affects their taxes. In some cases, they may know about a specific tax deduction, such as working from a home office, but are unsure how to file for that deduction. It’s important to take advantage of any and all deductions.
3. Forgetting About Estimated Taxes
Contractors are supposed to submit estimated taxes each quarter of the year. Some contractors are not aware of how to do that, so they simply ignore it or forget about it. The good news is that the IRS is often willing to give a grace period should you forget to submit your estimated tax. However, that grace period is short and soon the IRS will want to collect taxes owed.
4. Failure to Secure Contractor Status
Every contractor should have a clearly defined contract with each client that explicitly states that they are working as an independent contractor. Without this contract, the IRS may simply consider the contractor as an employee. This would take away many of the crucial business deductions available to the contractor.
5. The Misuse of Payroll
If you are a contractor with employees, you are responsible for paying federal payroll taxes each quarter. It is very important that the contractor is setting aside these funds on a regular basis. One common mistake the contractor will make is to borrow against they set aside funds. The problem is, once you borrow form those federal payroll tax funds, it can be tough to pay it back, which could lead to some serious ramifications, including the closing of your business.
You can actually avoid all of these headaches when it comes to taxes by having a professional account on your team. Call Hacker Accounting today to learn more about what we can do for contractors.