Tip #: Prepay Your Work Expenses
If you know youâre in for a painful tax bill, this strategy could help.
Hereâs how it works: rather than waiting till January to pay your regularly scheduled bills, pay them in December instead.
For example, if your business rent is due January 5th, pay it December 30th. This will allow you to claim more deductions in the current tax year â essentially borrowing from next yearâs write-offs.
If youâre going to use this strategy, itâs important to look ahead first. Here are some scenarios where prepaying could be a beneficial move and help you save money overall:
- You owe a sizable tax bill and havenât made any estimated payments.In this situation, reducing your tax liability by prepaying expenses is a good idea. The lower your tax liability, the less youâll pay in underpayment penalties and interest.
- You donât expect to have much â or any â self-employment income next year. People change jobs and hop careers all the time. If you expect a major change to the type of income youâre earning, itâs probably worthwhile to maximize your write-offs now.
- You expect to have more tax-saving opportunities next year.If you recall, only two things can lower self-employment tax: business write-offs and tax credits. So for example, if you plan to enroll in college, youâll have a sizable tax credit to play with. In that case, borrowing from next yearâs write-offs probably wonât hurt you.
Sarah York, EA
What Is A 1099 Employee
To call somebody a 1099 employee is misleading: To the person or company youre working for under a 1099, youre not an employee. Instead, youre considered an independent contractor. Your income throughout the year is reported to the IRS with Form 1099-MISC.
Independent contractors are different from employees in that you are providing your services to the client, but the way youre providing them is completely up to you. Youll typically sign an agreement or contract that includes your working terms, but you may not have the same legal rights as an employee including minimum and overtime wages.
Common types of independent contractors include:
What The Irs Says About Paper Receipts
Freelancers often think they need receipts for every single tax deduction. That’s actually a myth. To debunk it, we’re going straight to the source â the IRS.
The IRS says to keep records for your business tax deductions indicating:
- What you bought
- How much you spent
And guess what? It doesn’t mention requiring paper receipts at all.
Instead, the IRS says, quite bluntly, that âElectronic information management has become the standard in the private sector… instead of continuing to use traditional paper booksâ.
For an organization not exactly known for being progressive, thatâs about as clear as it gets: paper is out.
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Tip #: Dont Miss Your Business Write
Most write-offs are missed because people donât keep track of what they buy for work. In the frenzy to pull everything together before taxes are due, eligible write-offs tend to fall through the cracks.
Do yourself a favor and start keeping up with your expenses now. More of your purchases count as business expenses than you might realize, and they could significantly lower your taxable income. Here are a few examples of business tax deductions you can take:
- ð³ Bank and credit card fees on accounts you use for work
- ð Computers and electronic accessories
- ð» Platform fees, from Shopify to Patreon
If youâre wondering where to start with this, youâve come to the right place. The Keeper app is specifically designed for gig and freelance workers.
The app will find and sort all of your business write-offs automatically. When youâre ready to file, all you have to do is upload your 1099s, and weâll handle the rest.
Who Needs To Get A 1099 Form
Usually, anyone who was paid $600 or more in non-employment income should receive a 1099. However, there are many types of 1099s for different situations. Also, there are many exceptions to the $600 rule, meaning you may receive a 1099 even if you were paid less than $600 in non-employment income during the tax year.
Also Check: New York State Tax Form
How To Claim Business Expenses As A Freelancer
Use Schedule C to calculate and claim business expenses. Heres how:
The dollar amount listed on line 31 tells you your net profit or loss for your business.
Contact A Tax Professional Today To Avoid Paying Your Independent Contractor Taxes
Completing your yearly taxes can be frustrating and a little scary, but it doesnât have to be. If you take the time to examine your possible deductions, keep track of your expenses and business income in detail, and remember to take a deep breath, youâll be just fine.
If you donât trust yourself, the best thing to do is to ask the experts and turn to a tax-focused program for assistance with your taxes. With professional help, youâll improve your chances of lowering what you owe and avoiding an audit by the IRS during tax time.
Are you ready to stop stressing about your freelance or independent contractor finances? With its seamless, integrated, and automated tax software, Bonsai could be the solution youâve been searching for. From expense tracking and income reporting to estimated tax planning and much more, taxes will be a breeze!
Start using our accounting software for freelancers for free today and enjoy peace of mind when tax season rolls around. Our app sends you filing deadline reminders, estimate taxes and discovers tax write-offs automatically so you can avoid paying taxes. Try a 14 day free trial today.
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What Is A 1099 Form
A 1099 form is an information filing form that proves some other entity besides your employer paid you money. There are many different types of 1099 forms. For example, you may get one if your bank paid you interest or you earned income as a contract or freelance worker. Generally, the entity that paid you is responsible for sending a copy of your 1099 form to you in the mail.
Make Sure You Actually Have To Pay
Not everyone is subject to self-employment tax, but youâll likely have to pay it if you are:
- A sole proprietor
- A side hustler â even if youâre receiving W-2 income as well
Hereâs the bottom line: self-employment taxes apply to all âearned income,â which is money received in exchange for a product or service. Thatâs true whether or not itâs your main source of income.
For instance, letâs say you work a standard 9-to-5 job, but sell your handmade jewelry on Etsy for a bit of extra cash. Your sales are subject to self-employment tax!
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Quarterly Estimated Tax Payments
The U.S. tax system is a pay-as-you-go tax system, meaning you need to make tax payments regularly throughout the year. When youre an employee, your employer is responsible for withholding income taxes from your paycheck and sending it to the government.
So, how does an independent contractor pay taxes? When youre an independent contractor, paying the government regularly throughout the year is your responsibility. You do this by making quarterly estimated income tax payments. You can estimate how much you need to pay the government each quarter by guessing what your total income for the year will be or by using the amount youve paid in estimated taxes the previous year.
How Do I Calculate Taxable Income
Now, one pays tax on his/her net taxable income.
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Is Working 1099 Worth It
1099 contractors have a lot more freedom than their W2 peers, and thanks to a 2017 corporate tax bill, they are allowed significant additional tax deductions from what is called a 20% pass-through deduction. However, they often receive fewer benefits and have far more tenuous employment status with their organization.
Self Employment Tax Calculator
Small business owners, contractors, freelancers, gig workers and others whose net profit is greater than $400 are required to pay self-employment tax. Self-employed workers are taxed at 15.3% of the net profit. This percentage is a combination of Social Security and Medicare tax.
Use this Self-Employment Tax Calculator to estimate your tax bill or refund. This tool uses the latest information provided by the IRS including annual changes and those due to tax reform. Gather your 2022 tax documents including 1099s, business receipts, bank records, invoice payments, and related documents to fill in the drop down sections. Explanations for each question are provided below in the chart. If you have questions about your self-employment taxes a Tax Pro can help.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
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When Losses Can Help
Sometimes, losses can help you reduce your tax bill without any negative impact on you.
For people who freelance as a side hustle
People who freelance alongside a W-2 job might find themselves losing money on their side gig initially. You can take this loss and use it to reduce your income from your W-2 job.
For example, let’s say you work a full-time job, where you make $50,000 a year. You also drive for Uber on weekends. But your rideshare side gig cost you more money than you got paid. After deducting all your expenses, you ended up with a loss of $1,000.
On your tax return, you can take this $1,000 NOL and subtract it from your W-2 salary. Now, your overall income for the year is $49,000.
For people who freelance full-time
What if your only income is from freelancing? In that case, you may not be able to benefit from your loss the year you incur it. But if you include them on your tax return, you can carry it forward to future years.
Here’s how that works. Say you had a NOL of $1,000 the first year you went freelance. The year after, you start to hit your stride: your income, after expenses, is $10,000.
You can carry your loss from the previous year forward, reducing your income to $9,000 for the year.
How Can You Prove An Oral Contract
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won’t stand up in court. Instead, it becomes a matter of “he-said-she-said” – which legal professionals definitely don’t have time for!
If you were to enter into a verbal contract, it’s recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it’s always best to gain the permission of the other involved parties before hitting record.
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Hiring A Tax Professional
If you have any questions about filing your taxes or if your business has undergone recent growth, itâs a good idea to consult with a Certified Public Accountant . When youâre a potential new client, many CPAs are willing to sit down with you for a free consultation.
Even if you donât hire an accountant to do your tax preparation, they can help advise youâfor instance, on the best way to estimate your quarterly taxes. Learn more about how to hire an accountant.
You can also find tax professionals who can file for you and provide some tax advice for less than what a CPA would cost. With Bench, you can add tax advice and filing to your subscription and get unlimited, on-demand access to our in-house tax professionals.
Further reading:Choosing a Tax Advisor: Everything You Need to Know
Examples Of When You Might Get A 1099 Form
Some common examples when you might receive a 1099 include:
- If you earned $600 or more in nonemployee compensation from a person or business who isnt typically your employer, you should receive a Form 1099-NEC
- If you earned $600 or more in rent or royalty payments, you should receive Form 1099-MISC
- If you received a state or local tax refund during the previous year, you should expect to receive Form 1099-G
Likewise, if you paid a freelancer, independent contractor or other nonemployee $600 or more during the year related to your trade or business, you likely should send them a Form 1099-NEC.
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What Is Schedule C
As independent contractors, couriers are sole proprietors of their own business and must report their earnings by filling out a Schedule C tax form. This form is used to claim profit or loss from your business expenses as an independent contractor.
Schedule C has six sections :
- Identity section. This is where you describe your business activities. Most important is when filling out this section, on Line B, the six-digit business code for food deliveries businesses is 492000 . If you also drive for Uber and Lyft, the code is 485300 .
- Part I is for Income. This is how much you earned from your delivery gigs . The information youll need to fill this section out is found on the 1099-Misc or 1099-K form, which would be sent to you by the companies you drive for.
- 1099-MISC Explained: If you made more than $400 delivering food, youd receive this form. Postmates would not mail you one if you made less than $600. If you made less than $400, you still have to report the earning. Not receiving this form doesnt mean you dont report that earning.
- 1099-K Explained: This is the form for third-party payment transactions. Youd receive this form if you made more than $20,000 and over 200 transactions for the year. Youre more likely to get this in the mail if you drive for Uber or Lyft.
- Part 2 is for Expenses. This includes all the costs you accumulated during the year as an independent contractor. Below, I answer more questions on what you can report as deductible expenses.
Why Would There Be Withholding On A 1099
The IRS determines if a person or business paying compensation to another person or business has an employee or contractor relationship. Generally, the type of income statement form issued depends on the relationship . As it relates to income tax, an employee relationship requires an employer to withhold on wages in a contractor relationship, the worker is responsible for their own income tax. Michigan follows these federal guidelines. For guidance on determining of you have an employee or contractor relationship with someone who works for you, refer to IRS Publication 15, Employers Tax Guide and the Michigan Unemployment Insurance Agency Fact Sheet 155.
Generally, a contractor can request withholding from their pay. The business receiving contractor services could agree to withhold on the contractors behalf.
Read Also: What Is Form 8995 For Taxes
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What Is An Irs 1099 Form
The 1099 form is a series of documents the Internal Revenue Service refers to as “information returns.” There are a number of different 1099 forms that report various types of payments you may receive throughout the year other than what a business might pay you.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
Form 1099 is a collection of forms used to report payments that typically aren’t from an employer.
There are a variety of incomes reported on a 1099 form, including independent contractor income and payments like gambling winnings, rents or royalties, gains and losses in brokerage accounts, dividend and interest payments, and more.
If you work as an independent contractor or freelancer, you will often have income reported on a 1099 form.
You should receive most of your 1099 forms by January 31 each year to report the preceding years payments to you.
Add Your Independent Contractor Profits To Other Income To Determine Your Income Tax Bill
Doordash earnings impact our income taxes differently than they do self-employment taxes. Self-employment taxes are more straightforward at 15.3% of your profit.
Income tax is a totally different story. Your profits are added to your other income, including W2 wages, interest, investment, retirement, and other income. Then you throw in whether or not youre filing an individual joint return, whether you itemize, dependents, tax credits, and all that.
When its all said and done, total income minus adjustments and deductions equal taxable income. From there, calculate your Doordash taxes as a percentage of your taxable income.
Even then, its not that straightforward. As income increases, the tax percentage does as well. This is all based on tax brackets.
This is why its impossible to answer the question, how much will I have to pay in taxes because of Doordash? Many other factors include additional income and qualified personal tax deductions.
Remember that your income tax bill isnt the same as whether you pay in or get a refund. Income tax is the amount due to the government but is the part before credits and payments are applied.
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