As an independent contractor, you are still obligated to pay federal, state and local taxes on the income you receive. It can be challenging to file your income taxes without the assistance of a W-2 wage statement. Here are some general tips to ensure you are paying your taxes correctly.
Pay Your Licensing Tax
Many independent contractors do not know about licensing taxes, but these fees can add up over the years and result in a large expense if not paid on time. When you do business within a particular state, you must pay a flat fee licensing tax. Not all states have this tax, but the wide majority do; your city may also have a similar tax. If you pay a licensing tax to the state, you will likely be reported to the city as an independent contractor. Therefore, the city will be informed of your work and require you to pay a tax as well. For example, a hair stylist doing business in California will pay one licensing fee to the state. The stylist will then pay a licensing fee to any city in which he or she rents a booth for work. Your city's policy may be different depending on your profession, so check with your accountant to determine your fee.
Determine Your Estimated Income to Pay-as-You-Go
Prior to starting a year of work, estimate your income. You can use your income from the previous year as an indicator. It is okay if your estimate is not correct, but it should be relatively close. The important thing to note is the US federal tax system operates on a "pay as you go" schedule; you cannot wait until the end of the year to pay your taxes. Instead, you must make quarterly payments based on what you think you will owe. If you pay too much, you will receive a refund. If you pay too little, you risk owing extra money plus a penalty next April. Therefore, it is best to over-estimate your tax rate in a given year. Send in your payments to the IRS and your state tax board according to the quarterly tax schedule this year.
Request 1099 Statements
When you file your taxes at the end of the year, you can submit income statements based on your invoicing or bank deposits. However, this can be tricky, and the final quote rests on your shoulders. Instead, consider requesting 1099 statements from your clients. This works to their benefit as well, since your clients may owe payroll taxes on the income they issue you. At the end of the year, the individual client will supply a copy of your 1099 in return, and you can use this to report your income rather than an unofficial tally. This helps protect you should the IRS question your final calculations.
Save Your Receipts
Save all receipts and invoices in a given year. When you run your own business, a large number of expenses can be qualified as business write offs. Everything from rent to home insurance to gasoline can be written off in specific circumstances to reduce your taxable income. In fact, you can continue to make business expenses as long as your income from the business is greater than your outflow. To prove your reports are correct, though, you will be required to keep a record of all expenses, receipts and explanations of how they were business-related.
Look for Tax Reductions
There is nothing illegal about attempting to reduce your tax payment.
As long as you are following IRS code, you can continue to find
reductions. For a self-employed independent contractor, you have options
to reduce your income by contributing to retirement accounts, investing
in your business and other legitimate mechanisms for growing your
financial profile while still paying taxes on income. Do not neglect
these opportunities for savings just because you are not employed by a
corporation.
