San Francisco, March 30, 2018—It’s that time of year. Tax season is here, and it’s especially stressful for independent contractors — I know, my taxes this year are on a 1099, just as they have been for the last three years. Sure, being a contractor comes with a lot of perks, but it comes with extra tax and bookkeeping responsibility as well, as you’re essentially the business owner and payroll department all wrapped into one.
It’s a complicated process, and perfecting the ins and outs can take years. But, if this is your first year filing on a 1099, don’t worry! There are a few things to keep in mind, but it doesn’t have to be as daunting as it may seem. I’ve put together some tips for getting taxes done (and minimizing the bill) for any independent contractors who have been putting it off or are still trying to track down that last 1099 (I know I am).
April 17 is coming fast, and your leash for procrastinating is getting shorter by the day!
- Maximize your deductions!
Typically, an independent contractor’s initial tax bill will be a higher percentage of their income than for a similarly positioned full time employee. But that’s before you count deductions. Deductions are a contractor’s greatest shield from tax hell! And it’s easy to miss some. Here are some of the most common (and largest) business expense deductions contractors can claim.
- Health Premiums: It’s no secret that healthcare premiums are EXPENSIVE — especially for independent contractors that don’t have access to employer-sponsored group healthcare plans. Luckily, you can get a little relief on the cost burden by deducting your healthcare premiums. Not only are they fully deductible, they don’t need to be itemized, so the deduction comes out of your adjusted gross income. Even if you have other medical expenses that aren’t covered, such as chiropractor appointments, eyeglasses, or nonprescription meds, those are deductible too! So don’t skimp on your medical coverage just because of the high up front costs, remember you can reduce the load some at the end of the year.
- Home office: If you work from home, you may be able to write off a portion of your bills! To qualify, the space you use to work can not also be used as a bedroom, it has to be used exclusively as a home office. If it does, you can calculate your deduction by dividing the square footage of your office by the total square footage of your home. Whatever percentage you get, you can deduct that percentage of most housing-related costs, such as rent, bills, repairs, renter’s and homeowner’s insurance, and mortgage interest. Even at around 20% (roughly the size of my “home office”), it adds up fast!
- Car expenses: Whether you work for Lyft or just commute to meetings, if you use your car for work, you can deduct many car related costs. We’re talking everything from insurance costs and registration fees to gas and bridge tolls. There are two ways to go about it. The easiest route is to use the Standard Mileage Rate. This year, the rate is 54.5 cents a mile. That means that you multiply the total miles driven for work by 54.5 cents and deduct that amount on your taxes. If you go this route, make sure not to double deduct — that number includes all of your car-related deductions. But, if you are the organized type, you can use the Actual Costs Methodand deduct each item one by one. This often produces a bigger deduction than when using the standard mileage rate, but will require a drawer full of receipts!
There are many more deductions you can find, depending on your particular line of work, including office supplies and educational classes. Do some research and make sure to get them all so you don’t pay a cent more than you have to!
2. Keep good records
Even though budget cuts to the IRS have reduced the share of tax returns that are audited for six straight years, it could still happen to you — and believe me, it’s stressful. If you are audited, you better hope you kept good records of all of the expenses you deducted.
This includes receipts for all of your deducted purchases and tracking of all of your business-related miles. A tip I learned that I highly recommend is to scan all of your receipts and store them in a folder on your computer, that way you don’t have a dryer full of crumpled receipts to sort through at the end of the year. It is a tedious process, no doubt, but its a lot less tedious than trying to track them all down when the tax man comes calling.
As far as tracking your business miles, I recommend getting one of the many new phone apps that help you log and compile your total business-related miles. It’s a lot easier and more efficient than my old method of writing down the date and miles of all of my trips in a word document.
If you aren’t audited, you won’t need these records. But, in the unfortunate case that you are, having good records will save you a major headache, and potentially a lot of money in back taxes.
3. Remember your estimated taxes
I didn’t even know what estimated taxes were my first year as an independent contractor. Whoops! For the uninitiated, independent contractors are expected to send the IRS money four times a year, once each quarter, as long as they are expecting to owe more than $1000 in taxes for that year(roughly equating to $5000 in 1099 income). At the end of the year, your estimated taxes will need to equal 90% of your total tax liability for tat year, or 100% of your tax liability from the previous year.
Failing to pay quarterly estimated taxes will result in a penalty from the IRS. The penalty is variable depending on a wide range of factors, but it can get quite pricy. It is calculated as a percentage of the taxes owed for the year, and if you didn’t pay any estimated taxes, the total dollar amount can get high very quickly.
The due dates for each quarter are: April 15, June 15, September 15, and January 15.
Bonus tip: Don’t forget your crypto!
If you invested in cryptocurrencies this past year, the IRS will be expecting you to report any profits made from your investments! While they are much more likely to look at your portfolio if you made big-time gains, they are expecting everyone to report all investment profits, even the small guys.
Profits on cryptocurrency investments (just the profit you made at a time of sale, not your total holdings) will be taxed as capital gains. The exact rate is variable depending on your income and where you live. But, a good rule of thumb is that if you sold your cryptocurrency within one year of buying it, it is taxed at the same rate as your income. It is only if you’ve held the investment longer than one year that you can get taxed at the lower rate, which is around 15% for most people.
Cryptocurrencies are becoming mainstream, and Uncle Sam wants his cut of the moon shots as well!
(Note that this post is for informational purposes only and should not be relied on for, tax, legal or accounting advice. Consulting a tax planning professional is the safest way to reduce your tax liability while ensuring you comply with the applicable tax codes.)