Tax tips for independent contractors
Waving at the traffic with a faux torch in hand, Warren Russell plays Lady Liberty in front of Liberty Tax on Main Street in Nashua. (SIMÓN RÍOS/Union Leader Correspondent)
Q: In general, how is an independent contractor's tax liability and filing process different from that of a salaried worker?
A: For an independent contractor the main difference is that the contractor is responsible for paying quarterly taxes, since those are not automatically withheld from his income like that of an employee. The contractor is also responsible for paying not only his full share of Social Security and Medicare tax, but also half of his employees' share. The independent contractor also has the benefit of deducting qualified business expenses to help offset his taxable income.
Q: For those of us who pay taxes at the end of the fiscal year, what advice do you have for managing money so that we don't end up with a mountainous balance?
A: My advice would be to consider contributing to an IRA for a deduction, or consider making important business purchases before year's end to include those as business expenses in the current tax year and to help offset your net gain. Either way, make sure you plan to have your tax payment ready by the filing due date regardless, as an extension to file is not an extension of time to pay your tax bill.
Q: Do you recommend keeping separate accounts for business versus personal use?
A: Absolutely. This is critical not only for an organization, but for easy access to receipts and tracking expenses in the event the IRS questions your business expenses. It is recommended to keep a business credit account strictly for business purchases, and use the credit accounts billing statements to prove purchases and expenses in the event of an audit.
Q: What are the most commonly missed deductions for contractors?
A: This is a good one. Mostly, look for a tax professional who will dig through every line item on your Schedule C to maximize your true deductions. Look for things such as business use of the home, employee wage benefits or payments to independent contractors who are listed on separate lines of the Schedule C and often not calculated properly. Business travel, auto expenses, insurance and a lot of other expenses can help reduce your net business income and also reduce your portion of self-employment taxes. It is important to keep all receipts.
Q: For those who file on their own, which electronic tools do you recommend using?
A: The software is only as good as the person doing their own return. I have had some taxpayers come in only to find out they missed certain tax credits up to $1,000, just to save on the tax prep fee. That's an expensive do-it-yourself tax return. If you are going to use them, just look for something that has some type of professional assistance or advice to help guide you to a correct and accurate filing. If you have a more complex return, maybe look for a more advanced or premier type of software that can handle the Schedule C or things like rental properties, partnership, estate or corporate returns.
Q: Why come to a place like Liberty rather than using TurboTax?
A: We have trained tax professionals who will look for every deduction and credit we can get a taxpayer, and we offer a 100 percent satisfaction guarantee. We will dig and get you the most accurate return and biggest refund possible or the least tax liability.
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