Filing taxes can be an extremely challenging task to navigate, and even more so for independent contractors. Whether you work in construction, HVAC, landscaping, or another traditionally contracted position, you’re prone to fluctuation between big months and slow stretches, and a variety of invoices, expenses, and project timelines. All these factors can greatly affect your estimated income and in turn, your taxes.
Below are three common questions and answers to help you better understand your taxes and maximize your take-home pay:
1. WHAT EXPENSES CAN I DEDUCT?
When it comes time to pay the IRS, deductible expenses will significantly decrease your tax burden, but it’s tough to understand what can and cannot be deducted. Here are a few deductible items you may not be aware of:
Driving, maintaining, and upkeep costs of your truck or fleet
Regardless if it’s a single vocational truck or a fleet, or if you own or lease, you can deduct the cost of maintaining, cleaning, and repairing your truck on your taxes. Did you replace your tires, straps, load locks, or tarps? All of these can be written off on your taxes. However, keep in mind that if you do the repairs yourself, you can only deduct the cost of the parts, but not your labor cost.
Driving expenses, such as business-related tolls, fuel more than $100 out-of-pocket, and parking fees are also fair game when it comes to deductions.
Mobile phone (and data)
As a contractor, your mobile phone is likely one of your most important tools in addition to your truck. From staying in communication with your clients or customers, organizing your schedule, and managing projects on the go, day-to-day mobile phone use, along with internet and data, is a necessary business expense. You can claim a deduction on 100% of the cost of a phone, and the IRS allows you to deduct 50% of the cost for your mobile phone and internet data plans.
Home expenses for business use
Do you run many of the administrative tasks for your contracting business from your own home? If so, you can deduct a portion of your housing expenses such as homeowners’ insurance, rent, repairs and maintenance, utilities, and security systems.
Personal items and “home away from home” costs
Are you a landscaper that needs concrete cutters or a construction worker that needs a reflective vest? Any necessity you need to do your job successfully can be deducted in your taxes.
Also, if you work in the transportation industry and a project takes you away from home, don’t forget that you can expense “per-diem” rates. This allows you to deduct a percentage of the cost for lodgings, meals, travel expenses, and incidentals during your travel, with the rates differing depending on your profession. For example, the current per-diem rate for over the road (OTR) drivers set by the IRS is $66 per day.
Health insurance and retirement plans
Many W-2 workers are covered with health insurance and retirement from their employers. Independent contractors do not have that luxury. However, you can deduct the cost of your own health insurance, as well as any contributions you make to your retirement plan with the IRS.
Do you cover the cost of premiums for your spouse or dependent as well? Include those costs in your deductions.
While the above day-to-day expenses are relatively simple to track, it’s also important that you consider any self-employment tax deductions, as well as qualified business income deductions. As a 1099 worker, you are required to pay both parts of FICA (Federal Insurance Contributions Act) taxes. However, you can deduct half of those payments as self-employment taxes.
For your Qualified Business Income deduction, you are eligible for a deduction of 20% of your profit if you file your tax return as a sole proprietor, partnership, or S-Corporation.
2. WHEN SHOULD I FILE?
Though the response to this question may seem obvious (April 15, of course!), for independent contractors, the answer is not as clear. If you’re filing yearly as an independent contractor, you may be leaving a big chunk of money on the table.
According to the IRS, “The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated quarterly payments.” This means as an independent worker, if you’re earning money where taxes aren’t being taken out, you must make IRS payments on your earnings quarterly. A good way to determine this is if you receive one or more Form 1099 Misc. If this applies to you, you may face costly penalties when you only file taxes once a year: The penalty is up to 6% every month with additional penalties for late-payments and underpayments.
Don’t fall into this camp? It’s still worth considering paying quarterly. Paying quarterly on your estimated tax returns in advance allows you to avoid the blow of a large, one-time payment in April, which could add up to paying penalties and interest if you fall short for the year.
3. HOW CAN I STAY ORGANIZED?
Understanding what you can deduct and when you need to pay your taxes is crucial. But organizing all this information can make anyone feel overwhelmed, especially if you’re juggling several contract jobs at once. The IRS fine print can be a moving target as well, so it can be easy to miss some less-obvious deductions.
From small expenses like a new pair of utility gloves, to large expenses like a new truck, save every single business-related receipt. Organize your invoices by project, customer, and quarter to help you keep your timeline in-sync with your quarterly payments and deductions. In addition to original hard copies, scan every receipt and invoice and save a digital copy as a backup. This will also allow you to easily access and reference when you are on the go.
There are also a handful of free and low-cost online tools to help keep you organized and to answer any of your 1099-related questions. RoamHR is an app that gives you a dedicated and secure tax savings account. It recommends the right amount of money to save with each paycheck and even automates the process directly from your phone.
As an independent contractor, the freedom of running your own business can be a huge benefit. But this freedom also brings a bit of unpredictability. Ups and downs and life surprises may affect your bank account at any given time, but having a good sense of what you can deduct, when you should file, and how to keep organized will allow you to save a truckload when it comes to taxes.
FOR MORE INFORMATION
Rick Gonzalez is the CEO and founder of RoamHR, a digital platform empowering independent contractors to easily and effectively manage their taxes. Find out more, visit www.roamhr.com.