People that work for a business are usually classified as employees. This means the business owner is responsible for withholding and reporting a certain portion of the wages earned by the employee. These withholding’s are the employees tax liability, social security, medicare and unemployment taxes in each pay check. At the end of the year, the total taxable income must be proven with the W-2 form filed before the annual deadline in April.
The exception to this is when a business hires independent contractors to complete some aspects of the business. Independent contractors are responsible for their own tax payments and there are many ways that an independent contractor can improve their financial standing when it comes to tax liability.
It is pretty likely that you became a contractor because you have a skill that matches a need in the business world or perhaps, you didn’t like the 8-5 grind everyday and were looking for more freedom in your workday. No matter your reason, your goal is to become as successful as possible to maximize your income and profit. Below are seven great ways to become more successful as an independent contractor.
You many not have considered this, but requesting your own EIN or Employer ID Number can greatly benefit you. Instead of just being a “contractor for hire,” becoming your own business provides many tax breaks that you wouldn’t receive otherwise. This can take your annual income and improve it significantly. Learn more about business entity classification.
Open a separate business bank account. This is a smart plan regardless, but especially if you are classified as a business. Any audit that may occur is instantly easier due to the separation of these accounts. You have a record of your business’ financial transactions and can prove it. If your personal expenses are in the same account, your claims could be scrutinized.
All business purchases, large and small, must be recorded. You can take advantage of a variety of tax deductions, but you have to document your expenses with receipts and invoices. This record is your back up in case of an audit.
Keeping accurate financial records is the best way to account for your tax liability. Failing to file expenses and profit will ultimately lead you to be audited by the IRS. As a contractor, your wages will be heavily scrutinized and it is best to have the most accurate snapshot of your estimated tax payment to avoid being hit with a larger than expected tax liability.
Preparing for the future is the smartest decision any business owner can make and as an independent contractor, you should think ahead too. No matter how successful you are right now, things can always change. That doesn’t mean the quality of your work is bad, it just means that anything can happen. You might get sick or a natural disaster occurs and you are not be able to complete the work assigned. Even a change in the demand for your service can be impacted by changing trends.
Either way, preparing for the future will help reduce the stress and economic hit that you might feel during times like these.
Learn the benefits of tax planning and business ownership to take advantage of tax saving benefits such as:
As an independent contractor, you probably understand the need for outsourcing some aspects of a business. Likely, that is how you got your start. If you are loaded with projects that need to be completed, then doing your own taxes becomes a burden that you do not have time for.
Working with a professional accountant and bookkeeper will help to eliminate much of the stress that comes from being a business owner and helps you stay on track financially. In addition, keeping your books organized will put you in better position if you ever apply for a business loan.
The trusted small business accounting team at C.E. Thorn, CPA, PLLC know what it takes to keep area businesses profitable. Our team is ready to help you manage your bookkeeping and other business accounting needs.