5 IRS Tax Tips To Save On Return
This article provides 5 tax tips to save on on return for independent contractors. Working as an independent contractor is a great way to earn additional income, or have you own business without a lot of expense. However, if you're not careful, you can also end up owing a lot of money in taxes when you work as an independent contractor. The information provided in this article will help independent contractors save on their taxes at the end of the year.
- First, make sure you're properly classified as an independent contractor, and not an employee. The IRS provides a publication to help you do this. Publication 1779, "Independent Contractor or Employee" provides information on the three factors that the IRS uses to determine if you're properly classified: behavioral control, financial control, and the relationship of the parties. There is also a form that can be filled out and sent to the IRS, Form SS-8, where a worker can provide the reasons he or she believes they have been improperly classified as an employee or an independent contractor. The IRS will then review this form and make a determination.
- Once you determine that you have been properly classified, be sure to set aside money out of each paycheck to cover the estimated tax payments that you may have to make to avoid paying a lot of money in taxes at the end of the year. The IRS provides Form 1040 ES to help calculate your quarterly estimated tax payments. In order to complete this form you'll need your previous year's income tax return, as well as certain information provided in the instructions for Form 1040 ES. One easy way to figure out amount that should be saved is to use a calculator like the one found at paycheckcity.com to figure out how much would be held out if you were an employee of the company.
- Be sure to keep track of any business-related expenses you incur during the year. Business-related expenses are deductible on your tax return, both in your itemized deductions on Schedule A and, if you work out of your home, on Form 8829, Expenses for Business Use of your Home. You can deduct things such as a portion of your rent or mortgage payments, utility bills, repairs and maintenance to the part of your home you use for your business, as well as mortgage interest if you're a homeowner. However, if you do not keep track of these expenses, and have no receipts to support them, you could get in a lot of trouble if the IRS decides to audit you.
- Know what kinds of tax deductions you're entitled to. Bankrate.com provides information on different deductions that independent contractors are entitled to, such as mileage for any driving that's done as part of their work, or expenses for other means of travel. In addition, if you travel for your business, 50 percent of your meal expenses are deductible. Gifts bought for clients are also 100 percent deductible while traveling.
- Always look for help from the IRS or an income tax professional if you're still unsure of whether you're figuring your taxes correctly. Wait times to speak to the IRS can be lengthy, especially at tax time. However, they can provide helpful insight that might help save you from being audited and possibly having to pay even more in tax penalties. And, they can send you hard copies of the above-mentioned publications if necessary. However if you don't have the time to wait on hold for the IRS, going to an income tax professional can be a better way to get any help you need. In addition, the fees you pay to have an income tax professional prepare your taxes are deductible, and many income tax firms provide audit defense services in the event that the IRS does decide to randomly audit you.
Working as an independent contractor can be a profitable way to earn a little extra money, or even replace your existing income. Theses five tips will help you save money on your tax return, and also help ensure that your tax return is as accurate as possible. Have fun running your own business!