Income, expenses, and deductibles: Here’s what you need to know to stay on top of your tax returns! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Recently, I read an article from the Financial Times (FT) titled, “Money Clinic podcast: Get on top of your tax return.”
I found this topic relevant because about a month from now, those of you who are working as independent professionals would have to file your tax returns again.
The FT article talks about the key guidelines for filing taxes in the UK. It also answers some of the frequently asked questions about taxes and provides tips on how to make the whole process easier.
Today, we’ll be doing a version of that article but with a focus on the US audience. Since many of our readers and target audience are from America, we believe it’s fitting to equip them with knowledge about this topic in time for the filing of tax returns.
Keep reading to know how you can get on top of your taxes. With sufficient knowledge about these things, you’ll manage your finances more efficiently.
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
Being an independent contractor comes with a lot of freedom. You can:
- Choose how you want your schedule to look like
- Work wherever you like
- Select the clients you want to work with
… and the list goes on.
In fact, according to MBO Partners’ 2021 State of Independence in America report, the number of independent workers in the country grew from 38 million in 2020 to 51 million in 2021.
That means around 35% of the US workforce is made up of independents now.
However, being an independent professional also has its fair share of challenges. These could include figuring out how to get clients or setting your rates effectively.
One of the biggest challenges you might face as an independent is learning how to pay your taxes. If you previously had a traditional job at a company, you might still be accustomed to having your employer automatically deducting taxes from your paycheck and working on the next steps.
Once you shift to an independent career path, you have to make adjustments and own up to the responsibility of staying on top of your tax obligations.
Simply said, you have to learn how to file your tax returns on your own.
Here’s when each quarterly payment is due this US tax year:
- April 18, 2022
- June 15, 2022
- September 15, 2022
- January 17, 2023
It’s important to stay on top of each quarterly payment to avoid late penalties. If you miss the deadlines or don’t make sufficient payments, you could face an interest charge of 3% per quarter as per the IRS’ (Internal Revenue Service) October 2021 data.
Below are a few tips to help you stay on top of your tax returns:
- Stay organized all year round.
Tax time is stressful for some independent contractors… but that doesn’t have to be the case all the time!
To make the entire tax process smoother, make it a habit to keep a clear record of your income and expenses as they happen. This could mean updating your records daily, weekly, or monthly depending on your circumstances.
Keeping track of your records shows you’re taking care of things while they’re fresh on your mind. This will prevent you from getting overwhelmed with a mountain of disorganized information at the end of every quarter!
- Make sure your tax-related documents are prepared and complete.
As an independent contractor, there are a few documents you need to be familiar with:
- 1099 Forms
- Your income statement
- A record of your expenses
Instead of the W-2 form you get from employers, expect to receive the 1099-MISC Form or 1099-NEC Form from each client who paid you USD 600 or more for a particular tax year. If a client pays you through PayPal or any similar service, expect to receive the Form 1099-K.
What tax form do you need to fill out?
You must report all your income and expenses through the Form 1040.
Here’s how to do your taxes using the form:
- Part I of Form 1040 – This is where you report your income, including the 1099 forms you received from your clients. You also need to input any other income you earned as an independent, regardless of whether or not you received a 1099 form for it.
- Part II of Form 1040 – This is where you report all your expenses throughout the year. Reporting these enables you to claim your tax deductions.
Once you’ve filled out all the documents and forms, you may send them to the IRS together with your quarterly payment.
- Consider working with a tax expert.
Working with a tax professional or a Certified Public Accountant (CPA) pays off well―not just in terms of helping you figure tax-related things out but also in terms of helping you lower your tax burdens and avoiding potential penalties.
However, the decision to hire a tax expert still depends on you. If your tax status stays consistent throughout the year, doing things on your own is valid. Just make sure your records are regularly updated, as discussed in point #1.
On the other hand, if you have multiple income streams or you work across different state lines, you might want to consider talking to an expert. A good tax professional will help you identify deductions and save money in the long run.
- Know your deductibles.
Independents can claim various deductions to reduce their tax burden… but some are not aware that they can.
In other words, some independent workers are paying more than they have to in taxes.
Here’s the thing: Although you have to pay both self-employment tax and income tax to the IRS, the upside is you can rightfully minimize your tax burden by claiming deductions.
Here are some of the most commonly accepted deductions for independent professionals:
- Home office space
- Office supplies and equipment
- Work phone bill
- Fees for a workspace membership
- Vehicle expenses or gas
- Business meals
- Software and website hosting fees
- Marketing and ad fees
- License and certification fees
- Professional membership fees
- Legal and professional service fees
Keeping a clear record of your deductibles along with your income and expenses is handy when tax time comes. If you think you are eligible to claim several deductions but aren’t sure how to go about it, working with a tax professional, as discussed in point #3, can be helpful for you.
That’s it―a few simple tips to help you make tax time smoother and more convenient!
Remember to keep a folder or other proper storage of your tax forms, documents, and other financial records for easy referencing. Make sure you take advantage of your deductibles too.
With planning and organization, you’ll make staying on top of your tax returns easier. This will also save you a great deal of time, money, and headaches.
We hope you gained a lot of useful information from this article!
Keep in mind that learning how to properly do your taxes as an independent professional is one part of building a successful and thriving business and independent work.
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
Valens Dynamic Marketing Capabilities
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