Being an independent contractor has its perks. You’re your boss, you get to set your hours, and you can choose which projects to work on. It can be an ideal lifestyle for those who loathe the nine-to-five grind. Those who work as independent contractors can decide their working hours, have more flexibility, and be in charge of their workload. Also, they can work from wherever they like.
On the other hand, employees have set hours, less control over their workload, and are answerable to a boss. Of course, there are also some drawbacks to being an independent contractor. One of the biggest drawbacks of being an independent contractor is having to pay taxes.
When you’re an independent contractor, you have your own business. This means you’re responsible for your own taxes. Unlike an employee, you won’t have an employer who withholds income taxes from your paycheck and pays them to the government for you.
So, when it comes to taxes, you’re on your own when you’re an independent contractor. This can seem daunting, but with a bit of preparation, it can be a relatively straightforward process. Here are some tips to make tax time less stressful:
Keep track of your income and expenses
Throughout the year, make sure that you document and keep track of all your income and expenses. This way, filing your taxes won’t be too overwhelming and cluttered. It also helps to have everything organized in case you are audited.
Thankfully, there are several ways you can track your income and expenses. For example, you could use a spreadsheet, or you could use accounting software. Whichever method you choose, just make sure you maintain consistency.
Keeping track of your income and expenses can also help you when you need to set aside money for taxes.
Get to know different types of taxes.
Familiarize yourself with the different types of taxes that apply to independent contractors- there are federal, state, and local taxes to consider. Doing so will help you determine how much tax you need to pay.
In federal taxes, you can find income tax, self-employment tax, and Medicare and Social Security taxes. State taxes include sales tax and state income tax. This all depends on where you live. In some areas, you might also have to pay local taxes.
Start by gathering all your paperwork- receipts, invoices, bank statements, etc.- and put them in a file or binder so you can easily find what you need when it comes time to file your taxes. Keeping all your paperwork organized will make tax time less stressful.
Then, take some time to familiarize yourself with the tax filing process. This will help you ensure that you are filing your taxes correctly and help you avoid any potential penalties.
Use a tax software
If you’re having difficulty getting organized or understanding the tax filing process, you may want to consider using tax software. Getting some help from software will help you keep your paperwork organized.
There are several different tax software products on the market to help you prepare your return- this can be especially helpful if you have a lot of deductions or credits to claim.
Seek help from a professional
Lastly, if you need help preparing your taxes, don’t hesitate to seek out the use of a professional. A tax preparer or accountant can help you ensure you take advantage of all the deductions and credits you’re entitled to and can help you file your return correctly.
Paying taxes as an independent contractor doesn’t have to be stressful. With a little bit of preparation, you’ll be ready and organized to tackle your taxes with ease. And, if you need help, several resources are available to you, from tax software to professional tax preparers.