An independent contractor is self-employed and offers his or her services to other people. Tax experts at Equinox Business Solutions explain that tax preparation for independent contractors is different from regular employees. You will have the title of “sole proprietor” which means that you are a small business, but this doesn’t require you to incorporate. Here’s what you need to know about the tax rules governing your new designation:
Preparing for Income Taxes
Working as a sole proprietor means that you now own a business. Income tax, social security, and health insurance will not be automatically deducted from your paycheck. Instead, you have to declare your profits as an independent contractor and pay the corresponding business tax.
You will have to fill out a form called a Schedule C, which summarizes your income and expenses. You can also deduct expenses related to the job, such as advertising expenses, legal and professional fees, and home office maintenance costs. Keep in mind that you have to keep a record of each expense to prove its legitimacy during an audit (if there will be any). You can take as many deductions as you can, but you should be able to verify that they were spent for business reasons.
Paying Income Taxes
Identify all the income from your business activities and deduct any expenses related to them. You’ll then arrive at your net income which you will declare at your state. If you think that tax stuff sounds too complicated, you can hire a professional to do it for you. Hiring an accountant is an easy and hassle-free way of filing your taxes. They will simplify the process and handle the paperwork, so you’ll have more time for your business.
Like every employee and business owner, independent contractors are also required to pay their taxes. Organizing your duties now will save you from a headache and penalties in the future.