Many adults only have to think about their income taxes when they file their annual tax returns. Their employers handle the necessary withholding of estimated taxes and send the money directly to federal and state authorities. However, those who aren’t employees may have to handle their income tax matters on their own.
When you are self-employed or an independent contractor, your tax responsibilities are different. You will have to calculate and pay your own income taxes. It is very important for you to understand what obligations you have and how they differ from those of the average employee.
Generally, pleading ignorance will not excuse you from penalties if you make any of the common self-employment income tax mistakes listed below.
You fail to make estimated quarterly payments
The first year that you report income as an independent contractor, you do not have to make estimated quarterly tax payments. However, once you have filed at least one prior return as an independent contractor, you have an obligation to file quarterly estimated taxes for the next year. Failing to send in all four quarterly estimated payments could result in penalties.
You get far too creative with the business write-offs
The deductions and write-offs available to self-employed individuals have changed in the last decade and will likely continue to change frequently. Understanding the standard deduction and when to itemize is very important. So too is making sure you have adequate documentation for the deductions you claim. Otherwise, you can face major penalties in the future.
You delay filing a tax return because you can’t pay the balance due
Especially the first year you work as a contractor, it is important to retain enough in savings to pay the taxes owed on your income. Otherwise, you may find yourself in a position where your taxes are due and you don’t have enough money set aside to cover them.
Delaying when you file your tax return might lead to major penalties. Even a payment arrangement could cost you substantial amounts of money in the form of interest and fees.
Learning about unique tax laws that apply to independent contractors can help you better comply with your tax obligations.