Are you an independent contractor? Do you know the tax planning? Ok, don’t worry. I’m here to guide you and help you pay the quarterly tax instead of the yearly burden.
It is important to prepare and plan taxes as an independent contractor, as it will reduce the burden of big amounts. Take advantage of deductions like home office expenses, internet and phone bills used for work, and professional fees.
In this guide, I will discuss the Tax refund strategies for independent contractors.
Top Tax Refund Strategies
As an independent contractor, your tax deduction and tax paying are different from your employer’s. Employers’ tax burden goes to the employer, but self-employed have to pay for themselves. Independent contractors receive the 1099 tax form and employees get W-2 where details are mentioned on how much they paid throughout the year.
Here are some tax refund strategies for independent contractors. Read in detail below:
Self Employed Tax
Paying self-employment tax can be a burden on self-employees because you have to pay the tax like social security and Medicare. On the other hand, half of your taxes are covered by the employer if you work as an employee.
This current cost is Medicare 2.9% and Social Security 12.4%, a total of 15.3%, which you have to pay as self-employment. However, thankfully, there is a way to refund and deduct these taxes from your business expenses. Include your self-employment tax along with your personal tax through the Schedule SE form.
Home Office
Working from is the flexibility to work at your own pace. However, as an independent worker, you may have a specific place in your home for work. The good news is that you are eligible for a home office tax deduction.
The most common two methods are used to calculate home office tax deductions. The easier way to calculate the office square footage is to multiply by five SF.
Phone and Internet Usage
There is another best way to deduct tax from an independent contractor. You use a mobile phone and the internet on a daily basis, and you can reserve a specific portion for business use. However, try to avoid the personal use cost for your home. It is better to reserve a specific internet and mobile landline for the business.
For example, if you spend $300 for your mobile and internet and use 50% internet for your business, you can save a refund and deduct $1500 per year.
Car Expenses
It is another best way to deduct tax from your car usage for business. Undoubtedly, most people use cars for business trips, travel, and others. However, it is important to keep a track record of your business trips, how much you have spent on your vehicle, and the reason why you travel.
There are multiple ways to calculate your expenses; the simple way is to use the IRS method or your total expenses cost. $0.655 is the standard mileage to calculate.
Multiple $0.655 with total mileage.
Business Travel Expenses
Yes, you can deduct self-employment tax from business travel expenses. But, there are some specific requirements. It is important that you travel more than your normal workday. Also, you must be traveling to another country, city, or state. It is also necessary that you have pre-planned trip purposes and business activities.
A good news is that you can deduct upto 100% if your business travel meets the requirements. You are able to refund your bus, train or plan tickets, also there is a chance to refund the transportation.
Education Expenses
If you spend money to improve your skills and expertise, you may be eligible for tax deduction. Your learning skills must be related to expanding your existing business. However, if you are learning something new to start a new business, you are not eligible for the deduction. You can deduct the lab fees, books, tuition, and transport expenses.
Meals
When you are out for a business trip, whether alone or with the client, you are eligible to deduct your self-employment tax with meals. However, make sure to keep the receipts, and you will be able to refund 50% of the meal cost. One thing more, your business trip entertaining activities are not detectable such as watching movies, golf playing or anything other.
Business Interest
If you pay interest for your business, it is also recognized as a business expense, and you deduct it. However, if you are paying the loan interest for both personal and business expenses, it is important to know how much you have paid for personal loan interest and business loan interest. This will reduce your tax burden, and you can make sure to pay through interest and deduct up to 100% interest.
Insurance
Whether you pay for personal or business insurance, you are eligible to deduct the insurance cost as a business expense. It is important to check your personal and business insurance to deduct accordingly. If you pay car insurance, you are also eligible to deduct car insurance for tax, but your car must be used for business purposes.
Summary
As an independent contractor, I know that tax paying is necessary, and it can be a burden to someone. But if you are already prepared before the tax date, you will not have to face the burden. I have discussed the tax refund and deduction strategies. Make sure to know you are eligible for the tax deduction and self-employment tax. Everyone’s situation is not the same, so you can take the help of a tax expert to make smart decisions.
