Taxes for Independent Contractors: Tackling the Necessary Evil
It’s tax time. The best time of the year, right?
It’s almost as fun as a trip to the dentist’s office the day after Halloween.
This is an article for independent contractors who got paid more than $10,000 last year. If you didn’t quite make that mark, there’s some good tips here for you too, so keep reading.
However, veteran sales reps, CSPs, BMs, DMs, and DVMs? Listen up because this is for you.
Most of us don’t get our taxes done the moment we receive our 1099s from Olean. Most of us procrastinate to the last possible minute. Some of us even assume that if we close our eyes long enough, the IRS will just go away.
Or just put our taxes and other undesirables in a box like Nick Miller and ignore them. Good luck with that.
Being an independent contractor means your taxes can be a bit more complicated than for those who get a W-2 and have standard deductions.
The good news is it’s early. So get the ball rolling NOW and get this off your plate as quickly as possibly and get back to priority numero uno: growing your business.
Note: I’m not an accountant. I’m not a lawyer. I’m just a guy who’s been an independent contractor for the vast majority of my working life. This note releases me of any accusations or obligations if you decide to take my free advice as gospel.
Deal? Deal. Read on.
The Cost of Tax Procrastination
“So what if I don’t hit the April 15 deadline?” you ask. Well, for starters, if you are registered as an S-corp, the deadline for your company filing is March 16 in 2015.
So there’s that. Get moving!
Even though filing an extension for both your S-corp and individual taxes is free, paying an accountant to do it costs money.
What most people don’t realize is that filing an extension only gets you more time to do paperwork. If you owe money for taxes, you still have to make a payment by April 15 (and March 16 too, for all you S-corp-ers). Otherwise you are subject to fun little fees like interest and late payment penalties, which get bigger as time goes on.
If you’re reading this in March and realize there’s no way you’re gonna get everything together in time, then do the responsible thing and file an extension through the IRS here.
Again, the point to emphasize here: Filing an extension doesn’t exempt you from paying taxes on time. It just buys you more time to prolong suffering if you didn’t get things done when you should have.
By the way, I’ve been there. I’m not judging. I’m trying to inspire you to NOT be me. Get moving and get moving now.
Luckily, it’s really not bad if you just suck it up and get started. My annual tax tradition is the following:
- Experience mental misery anytime I think about taxes (January)
- Block out time to get done everything I need to do (February)
- Breathe a sigh of relief while acknowledging, “That wasn’t that bad!” (March)
Conquering the Evils: Our tax tips for you
With that in mind, here’s an easy, tax-time step-by-step for first-time (or veteran) independent contractors.
Get a Tax Professional
Find an accountant, call your accountant, or utilize the family accountant. An accountant can help you negotiate the complex world of business expenses and deductions and save you a lot of money in the long run. And should you happen to get audited, you’ll have a tax professional who has your back.
Sometimes people use the logic of “I didn’t make that much money, so my chances of being audited are very low. I’ll just do it myself and it won’t matter if I mess it up.”
The first sentence is true. According to CNBC, your chances of getting audited are very low, especially if you’ve made less than $200,000 last year.
But go ahead and try to play the “I didn’t know any better!” card with the IRS. Doh! That argument works no better than it did to the state trooper when you were speeding.
Report all of your income
Make sure to report ALL of your income. One thing that could lead to an IRS audit is if there’s a discrepancy between your 1099 form (which is linked to your social security number) and what you’ve reported. (See a list of more red flags here.)
Companies were required to furnish you 1099 forms by Feb. 2 this year if they paid you at least $600, or at least $10 in royalties.
VERY IMPORTANT: If you’ve earned less than $600 from a company, it doesn’t mean you shouldn’t report this income. It merely means you should do so in good faith. (Read more here.)
Have your quarterly tax information handy. As an independent contractor, the government wants you to file quarterly taxes (also known as “estimated taxes”).
That means you’ll estimate (translation: guess) what you're going to be earning and, instead of paying one ugly lump sum at the end, pay increments in April, June, September, and January. Having the foresight to do this is a best practice and shows you're not trying to game the system.
If you underpay because you make more than you thought you would, it's not as painful to write a check for the difference.
And if you overpay? Yes, you do get that money back in a refund.
Paying quarterlies is simple as (1) telling your accountant, "Let's setup quarterlies" (2) saving a percentage of your paycheck (log in to VectorConnect and search "tax withholding") and (3) paying the amount when your accountant reminds you that it's due.
Simple. Responsible. Zero drama.
Note: If this past year was your first year ever as an independent contractor, it’s very difficult to estimate what your income will be. Ask your accountant how to best proceed for next year.
Deductions: Meals, and miles, and supplies, oh my!
Collect and label your receipts. A fun conversation to have with a tax professional begins with, “What kind of expenses can I deduct?” After you’ve talked, make sure to collect and categorize all your receipts ASAP.
Common expense categories related to doing business can include travel, advertising, materials and supplies, and continuing education (like conferences). Of course, expenses vary depending on your position with the company.
Consult with your accountant about how to submit mileage receipts, and ask about whether you are able to deduct for expenses such as cell phones and office equipment.
If your system for collecting receipts this year was crumpling them into a desk drawer? That’s better than nothing.
But tax season is also a good time of year to upgrade your habits. If you’re an experienced sales rep or manager with some good tips on how to organize your receipts throughout the year, please share in the comment section below. If you had terrible habits feel free to share how you’re going to upgrade for the current year.
Wanted: missing statements and receipts
Once you have a list of what is missing, IMMEDIATELY Hunt. It. Down.
This is where good people often fail.
Your accountant wants your bank statements from March, June and August. You’re certain you threw them away because no one looks at paper statements, except apparently your accountant.
You’re accountant also wants your mileage log and 10 receipts for meals, rope, and produce you cut on demos. You have no idea where they are. In fact, maybe you threw them away in an effort to declutter your life. Maybe the desk drawer wasn’t closing properly.
Whatever the reason, it’s no big deal. You’ve got this.
Go online and print out your credit card receipts, your bank statements, or whatever your accountant wants and submit these things ASAP.
Bottom line tax tip: When your accountant sends you that email requesting all the stuff that’s missing? Don’t let it sit buried in your inbox for three weeks. Put it to the top of your to do list.
Whew! Almost there!
All finished, right?
Sign prepared documents and ask your accountant if there’s anything else you need to do.
Important: your accountant hasn’t gotten any sleep since January 15th. So make sure it’s crystal clear if you’re supposed to be mailing something. There’s nothing worse than getting all the paperwork together and finding out six months later that it was never sent in because each person thought that other was going to do it.
This never happened to me. But I can assure you… it’s happened. And no, the IRS won’t wipe out the late fees because of a misunderstanding.
When he or she says “you’re done” five times, it’s time to really party!
Treat yourself to something awesome as a reward for getting it all done, like those fuzzy dice you’ve always wanted to hang on your rear-view mirror, or that pet pygmy goat. (Don’t really get a goat — they, like, stink and eat everything.)
And Finally, Keep Your Expectations Real
So first, some bad news: Your tax return won’t make you rich.
Independent contractors often end up owing money come tax time.
But the good news is that once your taxes are done, you’ll have time to focus on what CAN bring in those big bucks: your business.
Don't be that version of me who procrastinated too long, stumbled over extensions, paid late fees, and suffered emotionally and mentally. It's not as hard as your brain makes it.
So take a deep breath and get cracking, you tax rock star, you!