If you’re an independent contractor (and you’ve received a form 1099 for the 2019 tax year), you’ll need to plan for independent contractor taxes. If you don’t plan for IC taxes, your end-of-year tax bill could be both surprising and hefty.
For example, imagine Mary is working as a first-time 1099 independent contractor for a publishing house. She works between 100-120 hours a month and bills $40 per hour for her services. At the end of the year, she receives a 1099 form that shows she received more than $56,000 for her services.
Since she’s never worked as an IC before, Mary failed to plan for tax time. Not only was she shocked to find out to learn she needed to pay a 12.4% Social Security tax, she was also on the hook for 2.9% in Medicare tax. All in all, she was shocked to find out that she owed the IRS close to $8,600.
How an accounting firm can help
Had Mary spoken with an accountant early-on, the accountant would have instructed her to plan ahead. For example. They would have recommended she set aside 20-30 minutes per week to add up her expenses for things such as home office supplies, mileage, and utility bills. Spending a little bit of time to do this weekly, can help prevent the stress of needing to do it all at once. It can also help prevent deductions from falling through the cracks.
Her accountant may have also suggested she make quarterly estimated payments to the IRS. This way, she could avoid needing to write a huge check at the end of the year. Most tax professionals recommend that ICs make quarterly payments if they expect they’ll owe more than $1,000 in taxes.
Lastly, Mary’s accountant would have educated her on the types of things she can (and can’t) deduct from her IC taxes. This way, she could have kept track of those items throughout the year.
If you plan on working as an independent contractor, you’ll want to schedule an appointment with an accountant. Not only will the tax professional be able to answer your questions about how to prepare for next year’s tax season, they can provide you with tips on how to stay organized. For more information on how our firm can help you plan for independent contractor taxes, call us today to get started.