When we launched in 2013 we were incredibly confused about the
complex tax rules around our business and our members. We relied heavily
on tax ninja and working parent Mary Robin Baziak to teach us how to
set up our business properly. She is an expert on working as an
independent contractor and when asked to contribute some tips for our blog she way over-delivered and created a rule book that is required reading for every Second Shift member.
The info about the tax rules around
the “gig/ 1099 economy” seem murky and scary– what do you feel are the most
important things to remember about working as an independent contractor? .
1, Stop giving out your Social Security number and get an Employer ID (EIN)
number. This accomplishes two things: It protects you from identity theft, and
it shows the IRS that you are a business.
2. Open a business bank account, using your new EIN, to separate your
personal finances from your business finances. If you ever get audited, this
step will make it easier to prove your business expenses to the IRS. The
further comingled the personal and business transactions are, the more leverage
an IRS agent may have in reversing real business expenses under an audit.
3. Keep books. If you don’t know how to keep your books, it’s time to either
learn or hire a competent bookkeeper. Being able to read and understand your
business’s financial statements will help you cut costs, get loans, understand
when to raise prices, and help you with tax planning. Quickbooks is a very
powerful software that is user friendly and is relatively inexpensive.
4. Select accounting software that’s appropriate for your business—don’t
just use something that doesn’t really meet your needs just because it’s free.
These days, there are sophisticated choices that can not only track your
bookkeeping needs but also help you create a business website. Many types of
software will track your inventory and sales; keep track of billing; keep
records of your sales taxes by state; place your products into online sales
forums; and give you access to your records from anywhere.
5. Do some tax planning. Read a book on small business taxes (like mine, Small
Business Taxes Made Easy) to learn how about tax benefits available to
business owners of all kinds. There are lots of ways to get tax benefits for
your family’s medical expenses, retirement plans, childcare, and more, but you
can’t get them if you don’t know about them.
6. Pay your estimated taxes. After you have the numbers and know what they
mean, and once you have reduced your profits by taking advantage of tax
planning, you can determine your quarterly profits. Don’t get behind in
estimated taxes because the penalties and interest can be very expense.
7. Remember: Even if your overall taxable income is a loss, you may owe
taxes because your Schedule
C had a profit. You’ll be paying 15.3 percent as self-employment taxes
(Social Security and Medicare) on those profits.
What are the most common mistakes you see independent contractors make in
their tax filings? Common Tax Mistakes to Avoid
There are many potential
mistakes any taxpayer can make when trying to understand the complexities of
the tax code.
1. Not Securing a Written
Agreement – Or Not Reading One
The first major mistake that
newly hired independent contractors make is not securing a written agreement
that specifies the terms and conditions of employment. Before you engage in
long term contract work (more than 30 days), sign a contract that spells out
your status as an independent contractor and not as an employee. Most large
companies will ask you to sign their standard agreement before you start work.
Be sure you understand it, and get legal advice if you are uncertain about the
specifics.
It typically costs $300-500
to have a lawyer review an employment agreement, but if you are a high-income
professional taking your first contract position, it could be money well spent.
How the IRS classifies you makes a big difference in the types of taxes you’ll
owe.
2.
Forgetting to Pay Estimated Taxes
Independent contractors, the
self-employed, and freelancers must pay estimated taxes to the IRS and any
state tax authorities four times a year. While employees can wait until April
15 to file an annual tax return and pay any monies owed, that’s not the case
for independent contractors.
There are four dates that
should be circled in red on the calendar of any independent contractor:
- January 15
- April 15
- June 15
- September 15
Not filing and paying
quarterly estimated taxes on these dates is a shortcut to problems with the IRS
and state tax authorities for any freelancer, independent contractor, or
self-employed individual who expects to owe $1,000 or more when filing an
annual return.
The rules for estimated tax
payments for sales taxes, business and franchise taxes (note that you don’t have
to own a franchised business in order to owe a state franchise tax – it’s what
some states call the business tax charged to all businesses), and local and
state income taxes in your home state may be different. So check your state’s
laws – or talk with an experienced tax adviser who understands the rules for
small business – in order to avoid problems.
3. Not Documenting
Deductible Business Expenses
In order to take advantage of
all the business expenses that can reduce the amount of taxes you owe, you need
the right records. And that means a bookkeeping system and procedures that will
help you manage the money that you earn as a self-employed independent
contractor.
One of the most common
reasons that freelancers run into tax trouble is not sufficiently separating
their personal and business expenses. If you are a high-income independent
contractor, a separate business bank account may be an important tax planning
tool.
Tax deductions can be quite
valuable, because they reduce taxable income for the year. For example, someone
in a 25% tax bracket can save $25 in income tax for every $100 in deductions,
while also saving as much as $15 in self-employment taxes for every $100
deduction from taxable income.
Meticulous records and
receipts are the keys to allowable tax deductions. To be deductible business
expenses, a cost must be:
- Incurred in connection with your trade, business, or profession.
- Ordinary and necessary expenses (as defined by the tax authorities).
- Must not be lavish or extravagant under the circumstances (as defined by the tax authorities).
General business expenses
include:
- A flat rate or per-square foot deduction for a room (or rooms) in your home used exclusively for business.
- Telephone bills for a second phone line used exclusively for your
business, including the cost of an answering machine or service and long
distance. - Legal, tax, accounting, and professional services for your business
- Training required to improve or maintain your skills
- Travel expenses for meetings with potential clients (but not commuting costs to and from a place where you perform work)
- Meals (“Necessary business-related meals” are 50% tax deductible
if they include direct business discussions. You must document the
specific business purpose, place, date, time, and include the names of
each person you met with and their business role.)
There are many other
deductions that are specific to certain kinds of businesses. For example,
writers can deduct the cost of research, performers can deduct fees paid to
agents, and artists can deduct the cost of materials and supplies, including
model fees. Carpenters, plumbers, and hair stylists can deduct the tools of
their trade. Talk to your tax adviser for specifics of allowable deductions associated
with your profession.
Clothing is one of the first
areas the tax auditors look at when auditing a tax return. Only clothing that
is primarily worn for protection (such as a welder’s mask and gloves) is
generally tax deductible. Always check with a tax professional before deducting
clothing.
As a
mother and business owner tell us how you manage to balance work and family?
What works for you?
It’s taken me some time to create a balance in both my
personal and professional life, but there are so many perks to being a small
business owner and working from home, it’s definitely worth it.
Here is my Top 10 for creating balance:
-Create boundaries.
-Make a schedule.
-Be organized.
-Delegate, outsource, auto-mate.
-Wake up earlier.
-Get help from your partner.
-Have a strong network.
-Be flexible.
-Take care of yourself.
-Let go of guilt
If you want to work with Mary Robin you can email her directly at maryrobin@baziakandcompany.com She has also offered….