And unlike your income tax you won’t be getting any returns on the emotional tax.
Ah, tax season. The time of year when those working in the USA frantically dig through their files, crunch numbers, and try to make sense of the ever-complicated tax code. For most people, taxes are stressful enough. But for those in the passion and gig economies — independent contractors who work for themselves or as freelancers — tax season can be an especially confusing and emotionally draining time.
One of the biggest challenges for independent contractors is figuring out what to do. Unlike with traditional employees, they aren’t given clear instructions on how to handle their taxes and it is most notably not at all done for them. As a result, many independent contractors are left feeling overwhelmed and unsure about what steps to take. To make matters worse, tax status itself for what it means to be an independent contractor is not always clear-cut. The IRS uses a set of criteria to determine whether someone is an independent contractor or an employee, and it is based on the level of control the employer has over the worker. For example, if the employer has the right to control the details of the work being performed, including how it is done and when it is done, then the worker is likely considered an employee EVEN IF you are on paper an independent contract. However, if the employer only has control over the outcome of the work and not the details of how it is performed, then the worker is likely considered an independent contractor. So figuring out what exactly you are, is a vital first step in this process.
For independent contractors, there are several things they need to do come tax season. First, they need to report all their income on their tax return, including income from all sources, such as freelance work or gig economy jobs. Second, they need to keep track of all their business expenses throughout the year, such as supplies, equipment, and travel expenses, and report those expenses on their tax return as deductions. Finally, they need to pay self-employment taxes, which are based on their net earnings from self-employment, including any income reported on their tax return as well as any deductions claimed. Sounds simple, but the reality is not quite that straight forward.
For those in the creator economy, such as artists, writers, and content creators, it can be even more confusing to know what can be written off as an expense. An expense is any cost incurred in the course of conducting business, such as supplies, equipment, and travel expenses. These expenses can be deducted from your income to reduce your tax liability, meaning it can basically reduce the amount you have to pay for taxes by that much. Certain expenses are always okay to write off, such as office supplies, software, and website hosting fees — anything purely business related that can’t be applied for anything else. Other expenses, such as travel and meals, can be deducted if they are related to conducting business. However, there are also expenses that are never okay to write off, such as personal expenses like rent or personal grooming, and fines or penalties for illegal activities (so no — your parking ticket cannot be written off). The gray area comes with expenses that have both personal and business use, such as a cell phone or internet service. In these cases, you can only deduct the portion of the expense that is used for business purposes. It’s extremely important to keep accurate records and receipts to show the business use of these expenses (making a tax folder in your emails to easily move any receipts or invoices there throughout the year is a helpful way to do this).
Another hurdle for independent contractors, taxes aren’t withheld from their paychecks like they would be for traditional employees, meaning you pay it all at once instead of over a paycheck. This means that come tax season, independent contractors may be faced with a much larger tax bill than they anticipated and may not be prepared for. And if they haven’t been saving enough throughout the year to cover that bill, they can find themselves in a tough financial situation.
Finally, adding to the stress is the fact that there aren’t many resources available to help independent contractors and the creator economy navigate the tax process. Traditional tax software and resources are geared towards employees, and don’t necessarily cater to the unique needs of independent contractors.
Tips for a Smoother Tax Season
So, what can independent contractors do to make tax season a little less stressful? Here are a few tips:
Keep track of everything. As an independent contractor, it’s important to keep accurate records of all your income and expenses throughout the year. This will make it easier to file your taxes when the time comes.
Set aside money for taxes. Since taxes aren’t withheld from your pay, it’s important to set aside a portion of your income throughout the year to cover your tax bill. A good rule of thumb is to set aside 30% of your total income for taxes.
Seek out resources for independent contractors. While there aren’t many resources specifically designed for independent contractors, there are some out there. Look for tax software and services that cater to the needs of independent contractors, or consult with a tax professional who has experience working with contractors.
Don’t be afraid to ask for help. If you’re feeling overwhelmed or confused about your taxes, don’t be afraid to reach out for help. There are plenty of resources available, including tax professionals, online forums, and even social media groups, where you can ask questions and get support.
Hire a professional. This is one of those times where it often is really worth it to hire an accountant to help you navigate these situations and oftentimes may be more affordable than you think.
At the end of the day, taxes are a necessary part of doing business as an independent contractor. But with a little preparation and some help from the right resources, tax season doesn’t have to be a nightmare. So, take a deep breath, gather your records, and get ready to tackle those taxes like a pro.
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