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6 tax tips for US independent contractors

Taxes are confusing enough for employees.

Independent contractors have to navigate the murky waters of self-employment taxes and figure out their own deductions.

Here are six tax tips for independent contractors that’ll hopefully make filing your taxes a little easier this year.

1. The IRS has a special form for independent contractors to use

If your work requires you to be classified as an independent contractor, you can file a 1099-MISC form.

You’ll need the total compensation paid (including non-cash items such as reimbursements and property) for the year and how much it was reported on each W-2.

2. You can deduct expenses that are directly related to your work

If you run a home office, you can deduct expenses like the cost of equipment, supplies, and even some utilities.

Keep records of all receipts or invoices that connect to your business.

3. Business-related mileage is deductible, but only 50% of the standard mileage rate

This isn’t a tax tip, but more of an important reminder.

Remember to document your mileage for both business and personal use so you can calculate how much you’ll be able to deduct.

There’s no need to track your miles on the actual 1040 form, but save all receipts or logs of your mileage in case they’re ever questioned.

4. If you have employees, you’ll need to file 1099s for them and pay payroll taxes

This is less of a tax tip and more of an FYI.

If your business takes on any employees, whether it be full-time or only temporary during the busy Christmas season, they will most likely be classified as employees rather than independent contractors.

This means that you’ll need to file 1099s for them and pay payroll taxes through a third-party service like Paychex, ADP, or Intuit.

5. Consult with an accountant or tax professional before making any decisions about filing status or deductions

It might seem tempting to save some money by filing as a sole proprietor instead of an LLC or S-corp, but if the IRS disagrees with your business structure you could be facing costly fines and penalties.

Therefore, before making decisions about filing status or deductions it’s recommended that you talk to a tax professional such as TaxConnex.

6. Independent contractors typically get audited more often than traditional employees do because it’s harder to determine their income and what they’re paying in taxes

This may seem counterintuitive since the “independent contractor” moniker is supposed to mean that you have control over your business.

However, it’s very easy for the IRS to look at your books and say, “Wait a minute… You’re not independent, you’re an employee!”

No matter how much or little you make, save all of your receipts and invoices.

This will help prove that you’re an independent contractor and not just an employee re-classifying your income to avoid paying taxes.

Conclusion

Independent contractors have to sift through a different set of tax laws than employees do, but that doesn’t mean you can disregard proper documentation.

Keep all records of earnings and expenses for at least three years, just in case the IRS wants to double-check your math.

Additionally, if you hire employees or subcontractors, make sure you follow the proper guidelines for reporting their income.

Make these six tax tips part of your business plan this year, and you’ll be well on your way towards filing an accurate return with the IRS.