Independent Contractor Tax Questions and Tips Q&A

Filing taxes as an independent contractor can be challenging and complex. The following posts has some suggestions and tips to make tax time as an independent contractor easier. The question and answer format should help many taxpayers understand their tax filing obligations as independent contractors.

 

Best Places to File Tax Returns

Tax Question: Can I file through places like H&R Block or Dillon’s, or do I need to go to a CPA? If I have deductions, which is my best bet? What’s the most affordable? What if I don’t have enough money to pay to have my taxes done? What kind of cost am I looking at here, and when is my deadline for filing?

Tax Answer: H&R Block and other commercial services should be able to help you, as will a CPA or EA. To make their lives easier and to make your bill smaller, make sure that your records are in order and provide them with a summary of your income and expenses. Think of going to a tax preparer as getting into a taxi. Once they start working for you, the meter is running. The more prepared you are, the less time will be on the meter.

 

First Year Paying Taxes Question

Tax Question: This year is my first paying taxes. I was told that since that’s the case, next year I’ll have to pay quarterly, whereas this year I didn’t have to but had the option to. But what if I have no idea how much money I’ll make? For example, if I estimate I’ll make ~$10,000, but actually make only ~$3,000, how am I supposed to pay my quarterly taxes? What if I make more? I literally can’t even guess how much money I’ll make. I could get no work or lots of work.

Tax Answer: If there was no tax liability for 2012, you don’t have to pay estimates this year but all of the tax will be due on April 15, 2014 so make sure that you have enough $ set-aside to pay. For 2014, you can pay your estimates based on your earnings as they are earned at March 31, May 31, August 31 and December 31. The payments are due on the 15th of April, June, September and January. You’ll probably want your tax return preparer to work up the amounts due.

 

Filing Taxes as a Freelancer

Tax Question: As a freelancer, am I supposed to get forms from everyone that commissions me for work as well as people I have ongoing work with for larger amounts of money? What if I can’t get forms from some people? I thought that they don’t have to send me a form if they didn’t pay me more than $600. Does that mean I don’t have to pay it? If I still do, what if I can’t prove that I earned that money?

Tax Answer: Not every customer will give you a 1099 form. The fact that they didn’t give you one doesn’t mean that the income is exempt from tax. It isn’t. As a sole proprietor, you have the responsibility of tracking your receipts and expenses, not your customers.

Independent Contractor Tax Questions and Tips Q&A

Remember: Whether or not you can write off certain business costs depends on if they are an “ordinary and necessary” expense for someone in your line of work. In an IRS audit, you would have to demonstrate to the satisfaction of a revenue agent that you need to buy the supplies or materials in furtherance of your own business.

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Seven Tax Tips for Students with a Summer Job

Many students get a summer job during their time off from school. It is important to remember that everyone has to pay taxes and file a return. Just because you are a student does not change much in this regard.  Here are the top seven things the IRS wants everyone to know about income earned while working a summer job. If it’s your first job it gives you a chance to learn about the working world. That includes taxes we pay to support the place where we live, our state and our nation. Here are eight things that students who take a summer job should know about taxes:

You may not earn enough money from your summer job to be required to file a tax return. Even if that’s true, you may still want to file. For example, if your employer withheld income tax from your pay, you’ll have to file a return to get your taxes refunded. You can prepare and e-file your tax return for free using IRS Free File. It’s available exclusively on IRS.gov. When no one else can claim you as a dependent, you can figure out whether filing a tax return is necessary by comparing the total income you earn from your summer job (and all other jobs) to the sum of the standard deduction you can take for the filing status you use plus one personal exemption. If your income is less than this sum, you do not need to file a tax return

 

Information on Taxes and Summer Jobs for High School and College Students

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1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the Withholding Calculator on IRS.gov.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

  • You are in the business of delivering newspapers.
  • All your pay for these services directly relates to sales rather than to the number of hours worked.
  • You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax. Babysitting, mowing lawns, and other odd jobs are generally considered self-employment. If your net income (income minus expenses) from self employment is $400 or more, the IRS requires you to pay self-employment taxes.

Regardless of the rules you follow to determine your filing obligations, there are ways to reduce your taxable income – the final amount you calculate tax on – other than taking the standard deduction and personal exemptions. Several credits and deductions can reduce your tax bill, some of which are available for the expenses you incur as a student. If itemizing saves you more in tax than the standard deduction, filing a Schedule A with your return can further reduce your taxes.

 

Additional IRS Resources on Summer Jobs:

 

IRS YouTube Videos on Part-time and Summer Jobs:

 

IRS Podcasts on Summer Jobs:

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7 Tips for Taxpayers Starting a New Business

Anyone starting a new business this summer should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year. You probably hear this from tax advisors and accountants all year long, but proper record-keeping year-round is the first step to ensuring your taxes are filed accurately and that you have the paperwork you need to back-up your deduction claims should you be audited.

Keeping your money for working capital rather than paying it out in taxes to Uncle Sam will give you an edge.

 

Below Are Some Starting Business Tax Tips

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  1. First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
  2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
  3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
  4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
  5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
  6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
  7. Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

 

Understand Your Business Deductions

What small business deductions can you take? Do you have the documentation and original receipts to back them up? Tax credits and deductions change each year. Both your CPA and your tax software can guide you through these deductions by asking you probing questions. These blogs also offer tips on common small business tax deductions and some deductions and credits that are specific to the 2011 tax year:

 

Additional IRS Resources on Business Taxes