Taking Terror Out of Taxes: Tax Tips for Independent Contractors

As soon as the bell tolls midnight on New Year’s Eve, I start thinking about it: The beginning of the year means time to prepare tax returns. Some people can’t wait to get them filed in anticipation of a nice fat tax refund check. Others dread the balance of income tax they know they owe the government. People from both sides of the issue shudder to hear the word “audit” and often knit their brows over details such as deductions, credits, and tax code (especially all the changes that happen from year to year).

Many of us on HubPages earn at least some self-employment income. For years, the idea of earning self-employment income terrified me. How could I possibly keep proper track of income and expenditures? How would I know what I which deductions were legal? Then, after spending a couple tax seasons selling tax preparation software, I was hired by a contractor who supplied technical support for some personal tax preparation products. As I worked with these products and answered questions for users, the puzzle of tax preparation became far less complex.

Before I continue, I should note that while I have worked with tax preparation software for a long time, I am not an accountant or a certified paid tax preparer. Additionally, I do not now nor have I ever worked for the IRS. The tips I give here are generalized and based on my experience with current tax preparation software but may not apply to every taxpayer’s situation. In short, if you aren’t sure about something, check with a tax professional or read the IRS publication yourself. I will supply some links here for your convenience.

If you are preparing your own taxes, I recommend that you use a software product or online program to assist you. Make sure the program you choose is credible and well-established. My personal favorite is H & R Block At Home®, previously called TaxCut®. Another good program is Turbo Tax ®. Both of these programs are available in online or software versions and come with free federal e-filing provided your return qualifies to be e-filed. If you have any type of self-employment income, it is probably a good idea to use a paid product instead of relying on one of the free online programs. In general, you get what you pay for, and free tax programs generally are not equipped to handle the complexities of self-employment.

Once you have chosen the product you wish to use, gather your paperwork. You will need all your income information for the prior year and also a copy of the tax return you prepared last year (if you filed taxes last year).

Those of you who have been making income at HubPages for more than a year are familiar with a 1099-MISC form. These are income forms that are distributed by companies who pay independent contractors to complete a particular amount of work for an agreed-upon payment (often based on percentage earnings or production volume).

A 1099-MISC is not a W-2. The income reported on it is not considered “wages from a job” by the IRS. Additionally, while line 4 provides a spot for reporting federal income tax withholdings on the 1099-MISC, most of the time no tax withholdings are made by companies that distribute these forms. This does not mean that earnings reported to you on a 1099-MISC are tax exempt. It simply means that you will need to be careful to properly fill out the self-employment section of your tax return.

In the tax preparation program that you have chosen, you will find a number of different income types. Income from your work as an independent contractor will be listed as self-employment income or “your own business.” Tax preparation programs walk tax payers through an interview process to determine what forms need to be prepared and what information will be entered on those forms. In the self-employment interview, you will likely be asked to list a name for your business. This often raises questions for first-time independent contractors, especially if you have not incorporated or established a name for your business. Often contractors will say, “I don’t have a personal business.” For tax purposes, you do. As to a business name, just make one up. For simplicity’s sake you can just use your own name.

Then follow the instructions in the tax preparation program for entering income.

If you are using a reputable tax software, reporting business expenses is generally easier than it sounds. Your program will walk you through a list of questions to determine what expenses you can write-off.

Beware not to enter any amounts that you cannot prove. For example, if you used your vehicle to drive to and from a contract work location, you will be given a place in the program interview to enter these expenses or the mileage for the vehicle. Do not guess on these numbers. Instead, throughout the year make sure you keep track of the miles you drive for your self-employment. For example, in addition to free-lance writing, I do direct sales for a candle company. When I get in the car to go to a candle party or to deliver products to a customer, I hit the “trip” button on my odometer. When I return home, I record the total business mileage for that day in a small notebook that I keep in my glove compartment. At tax time all I have to do is add the mileage for each trip and enter it into my tax software. Then my little notebook is stored with my tax papers for that year. Make it a habit to keep careful records for all the expenses you claim on your tax return.

If you want to claim a home office, be cautious. Current tax law stipulates that the portion of your home claimed as an office cannot be used for any other activity. For example, my home office doubles as a spare bedroom and is also used as a music room by my spouse; so I cannot claim it as a home office on my tax return. However, there is a closet in my home that is devoted to nothing but my direct sales product. We do not store old clothes or games or anything else there. This area I can and do claim as a home office on my tax return.

For other business expenditures, use common sense. Keep those receipts! It might help to have a separate checking account or debit or credit card just for these expenses. This way your expenditures are neatly recorded by your financial institution on statements that you can access online.

If your only income is from self-employment, you will (most likely) owe taxes. Don’t let this surprise you, and don’t let it frighten you either. Use your preferred tax preparation software to your advantage. For this year, if you didn’t prepare by setting aside extra money to pay those taxes or by making quarterly payments, make it easier on yourself by preparing your taxes just a little early. You won’t have to pay before April 15^th, but knowing what you owe can be empowering. You now have time to make arrangements. Then use the software to plan for the coming year. Most reputable products will have calculators to assist you in making estimated payments for the next tax year. Of course, tax laws are always changing, so you won’t get an exact number but you should be fairly close.

Once you have reported your earnings, deducted your expenses, and taken a look at preparing for next year, the hard work is done. Of course there is still the every-year work of figuring standard or itemized deductions and what credits you qualify for this year, but the software should pretty much do the work for you on those accounts. (Make sure you answer the questions it asks honestly, of course.)

An electronic signature and a few clicks of the mouse will conclude this year’s adventure in tax paying. Now you can get back to the fun stuff—making more money in the coming year.