As the economy continues to change, more individuals are embracing work as independent contractors as their primary source of income.
While being an independent contractor offers plenty of flexibility and independence, it also comes with unique tax responsibilities and challenges. Independent contractors are considered self-employed, which means they must navigate their tax obligations differently than traditional employees.
Those that are new to the world of freelancing may especially run into issues while working through figuring out their new tax predicament. Let’s explore 7 effective tax relief strategies that are specifically tailored for independent contractors.
These strategies will be key in helping independent contractors maximize their tax savings and minimize any potential tax-related hassles.
#1 Keep Detailed Records
For independent contractors, maintaining accurate and organized records is crucial. It’s vital to keep track of all income earned, any business expenses incurred, and copies of relevant receipts and invoices. Keeping track of the records in real time is also helpful so that you’re not left scrambling during tax season trying to remember all of the different sources of income and expenses.
When expenses such as home office costs, equipment purchases, and professional development expenses are incurred, independent contractors can maximize their deductions and hopefully reduce what they owe when it comes time to file their taxes.
#2 Separate Personal and Business Finances
To simplify tax preparation and ensure compliance, it’s helpful for independent contractors to establish separate bank accounts and credit cards for their business expenses. Mixing personal and business finances can easily lead to confusion and complicate tax reporting.
By maintaining separate accounts, it’s much easier for independent contractors to track all of their business-related transactions and easily prove their expenses to the IRS if ever necessary.
#3 Take Advantage of Deductions
Independent contractors are entitled to numerous tax deductions that can help lower their taxable income. For example, common deductions include home office expenses, mileage for business-related travel, professional association memberships, health insurance premiums, and many more.
By leveraging these deductions, independent contractors can reduce the amount that they owe to the IRS and, in turn, be able to keep more of their hard-earned income.
#4 Contribute to Retirement Accounts
Independent contractors and self-employed individuals have several retirement savings options that offer tax benefits. Contributions to retirement accounts such as Simplified Employee Pension (SEP) IRAs, Solo 401(k) plans, and traditional or Roth IRAs may be tax-deductible and can also help independent contractors build long-term financial security while reducing their current tax burden.
It’s helpful to do your research or speak with a professional to know which option is best fit for your needs and future plans.
#5 Estimate Quarterly Taxes
Unlike traditional employees who have their taxes withheld from their paychecks, independent contractors are responsible for paying estimated quarterly taxes to the IRS. Failing to make these estimated payments can lead to penalties and interest charges.
Independent contractors should do their best to accurately estimate their quarterly tax obligations based on what their projected income and expenses are and make timely payments to the IRS to avoid any unnecessary penalties.
#6 Consider Forming a Business Entity
Depending on the circumstances, independent contractors may benefit from structuring their business as a separate legal entity, such as a limited liability company (LLC) or S corporation.
Doing so can offer liability protection, potential tax advantages, and even additional opportunities for deductions. As always, it’s important to consult with a tax professional or legal advisor to determine the most advantageous business structure for your specific situation.
#7 Seek Professional Guidance
Always know your options. When dealing with the complexities of self-employment taxes, it can be extremely overwhelming for independent contractors. Consulting with a tax professional who specializes in working with self-employed individuals can provide invaluable guidance and support to help walk you through it.
Independent contractors who find themselves in tax debt or anticipate they may struggle to meet their tax obligations, should seek immediate assistance from a tax relief professional like the ones at Taxes 4 Truckers. We specialize in helping individuals resolve their tax debts, navigate complex tax issues, and develop personalized strategies to achieve financial relief and peace of mind.
Don't hesitate to reach out to our office today at 319-252-4501 or 1-888-TAX-4-TRK for a free, no-obligation consultation to review your options.