When you become an Independent Contractor (IC), you are really running your own business and as such, your focus is on your business and delivering services to the client who pays you. Administrative tasks such as having to do your own taxes in addition to delivering services can be quite burdensome, especially at first. If it is the first time you are doing taxes as a 1099 contractor, you will quickly learn that the tax code is very complex and it changes every year, so having a tax professional who keeps up with the changes is important.
It is important to seek the services of a tax professional who updates their knowledge each year as to what is deductible under the current tax law. Doing so will save you time and money. In addition, the tax professional will know what deductions they can or can’t take, can review past tax returns for additional tax savings, offer tax planning advice, and are responsible for filing taxes correctly. If they make a mistake, as long as you have provided them with all the pertinent documents, they may have to pay the penalty on your behalf as some firms offer a “peace of mind guarantee” at a nominal cost that pays any penalty that may be assessed. That reduces the stress of tax filing for you, and that’s well worth the cost.
As an IC, you should develop a relationship with your tax professional. Have them get to know your business, anticipate your expenses, and advise you on the kinds of things that are deductible to reduce your tax burden. During your visit, the tax professional will also provide you with the documents that you will need to pay your quarterly estimated taxes.
Since Independent Contractors receive their gross compensation, you will have to pay taxes in April, June, September and January of the following year. You should save about 30% of your compensation so you have the money to pay these taxes without penalty when they are due. Your tax pro will determine the amount you will pay each quarter and will print out the tax stub and mailing address where you will mail your check for both federal and state taxes.
From your records, a tax professional will identify what is tax deductible. You will need to track all your expenses as they are acquired and include the date, amount, what the expense was for and how you paid for it. Major credit card companies issue year end statements by category making it easy for a self-employed person to find the items that you will be allowed to expense. Save all receipts in a file or folder, print out your tracking report at tax time, and you are ready to go to the tax professional for a stress free year-end visit.
Most tax pros have the capacity to file your taxes online and send you an email when your taxes “have been accepted” at the federal or state level. If you owe money at year end, there may be a small penalty you may have to pay, and you will mail just the tax stub and check to that entity. If you will receive a refund and you provided your bank information, you will receive your refund directly back to your bank account on file.
For additional information about why an IC should hire a tax professional, visit the Accreditation Council for Accountancy and Taxation’s website.