The little things independent contractors should do before April.
Do you freelance or run a business on the side? You have a complicated tax situation, all stemming from one fact – when you earn a paycheck, taxes are not immediately taken out of it.
Many freelancers are caught off-guard when tax season arrives. They are stunned to realize how much tax they owe. If you would rather not be one of them, pay attention to these details.
You should have all your 1099-MISC forms in hand by early February. If you earned more than $600 working for an employer during 2017, that employer will send you a Form 1099-MISC.1,2
Frustratingly, some employers miss the January 31 deadline for issuing 1099s and send them out in the spring. No matter – whether you get a 1099 on time or not, you must report the income to the I.R.S. on Schedule C or Schedule C-EZ (and you must also report it to your state’s tax authority). Should you neglect to report any 1099 income, the I.R.S. will send you a letter noting the missing income and requesting the corresponding tax payment.1,2,3
If an employer has botched information on a 1099, tell the employer right away – it may be able to correct the error before sharing the misinformation with the I.R.S. If it turns out the I.R.S. already has the incorrect information, ask the employer to correct it on your behalf.1
As a freelancer, you can deduct many things. This also applies if you own a sideline business. Fifty percent of the Medicare and Social Security tax you pay is deductible. Hardware and software expenses as well as work-related advertising, travel, phone calls, mailing expenses, and office supply purchases may be deducted. You can deduct rent you pay to house your business, the cost of books and publications you purchase for it, and legal and professional fees you pay on behalf of it.2,3
Maybe you pay for your own health coverage. Freelancers who do so are eligible to deduct the cost of their health insurance premiums. You can even deduct Medicare premiums you pay for Part B, Part D, and the expense you pay for a Part C (Medicare Advantage) plan or a Medigap policy.2,3
If you have a sideline business, you are sure to receive Form 1099-K. This I.R.S. form reports income from debit card, credit card, and third-party network transactions. Your Form 1099-K should arrive in early February. When you get it, confirm its accuracy by checking your gross receipts, payment card records, and merchant statements. See that it reports income generated through all payment avenues (PayPal or similar services, credit cards, etc.).3
The income amount reported on your Form 1099-K does not have to be reconciled with the gross receipts you report on Form 1040. This is because adjustments to sales income (such as chargebacks) are not reported on Form 1099-K. That fact noted, keep documentation handy to support both your income and any deductions you want to claim on your 1040 and your state tax return.3,4
If your unincorporated sideline business is turning a profit, you should be making quarterly estimated tax payments, for two reasons. One, your earnings are not being withheld. Two, your net earnings are subject to self-employment tax.4
Coping with quarterly self-employment and income taxes may become a little easier if you change your withholding at your regular job. If you (or your spouse) does that, you might free up the money to cover the taxes generated by your small business.2,4
You can also lower those taxes by creating, and contributing to, a qualified retirement plan linked to your business, such as a Solo 401(k) or Simplified Employee Pension (SEP) plan. Your contributions to these plans are tax deductible, and they give you a chance to boost your retirement savings at the same time.2,3,4
If your sideline business has a loss for 2017, that loss is only deductible as a business loss if the I.R.S. characterizes your business as an activity with a profit motive instead of a hobby. So, take a look at the hobby loss rules before trying to claim such a deduction.4
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – forbes.com/sites/robertwood/2017/01/25/irs-forms-1099-10-things-to-know [1/25/17]
2 – kiplinger.com/article/taxes/T055-C001-S003-tax-deductions-for-independent-contractors.html [1/13/17]
3 – irs.gov/businesses/understanding-your-1099-k [8/3/17]
4 – smallbiztrends.com/2017/10/side-business-taxes.html [10/2/17]