How Independent Contractors Can Maximize Tax Laws to Minimize Payments
The dream of working independently can be more than just a dream. In the millennium more and more companies are trying to maximize productivity and minimize the overhead expenses. How do you make the most of companies willing to contract you independently for your services? How do you decide what is deductible and what is not? How do you keep more of your hard earned money?
The first thing you need to do is to determine what are the necessities of your office. Computer, Electric, Heat, Air Conditioning, Phone, Fax, Internet Service, Programs and Software, Answering machine or service, Desks, Chairs, File Cabinets, Power Protection Supplies all can be deducted if used for your business. If you work from your home the portion of the utilities can be deducted. A percentage of your house payment or rent (depending of the amount of space designated for your office) can be deducted. ANYTHING that logically explains the existence of your home office or business is deductible. The key is to saving the receipts and being able to determine the percentage of use for your business. For example a person running home daycare may deduct a larger portion of utilities, home space needed, groceries, satellite if used for entertainment purposes, phone, even internet access if incorporated into the daycare business. Whereas a person working from a home office using a smaller area of their home would have to determine percentages of the living space designated for their business to determine the deductions that could be made for their expenses.
Keep track of all supplies coming into your business down to the tiniest of ppr clips. They are all business needs and perfectly deductible for your taxes. Paper, pens, calendars, printer ink, folders, stamps, envelopes, postage, cleaning supplies to maintain your area, anything related to maintaining an effective environment to work. Also as an independent contractor be prepared. There are many sites out there that help to figure tax withholdings such as Paycheckcity.com that will determine what needs to be put back for where. Put back the amt needed for each paycheck so you are not left holding an empty bag at tax time. Find a savings account that will meet your needs and put money into it and leave it there. This could be the difference in whether you receive a refund or owe and money that you prepared for.
If your business grows and relocation of the office area or remodeling of the office area is required then remember to save the receipts for those investments as well. Many times when someone works from a home office these things can be overlooked. Not only do they add to the value of your home they add the the benefit of deductions when you file your taxes. Any type of home improvement for the purpose of your business is deductible by either percentage or the full amount.
Remember that any fees associated with training and maintaining certifications are also deductible. Many companies do not require this however there are a few that do. If you are running a business to where you are an independent contractor then incorporation fees, insurance, training fees or membership fees are also deductible. Being an Independent Contractor does place more responsibility on your role in your tax well being but can definitely be profitable if you prepare. Childcare is still deductible if necessary as well as transportation if need to meet your contractual obligations.
An independent contractor should be withholding approximately 16% of their paychecks per pay period to accommodate FICA, Medicare and state tax requirements. However with the deductions you are entitled to and by incorporating these deductions whenever possible the rate is actually much lower when tax time comes around. Dependents can still be deducted as well and earned income credit can still apply as long as you fall within your states regulations for income. If you are ever unsure about deductions you can check www.irs.gov and explanations are explained. If your not good with numbers or have multiple contracts then perhaps an accountant would work better for you. If your profit is considerable or you like lower monthly payment you may also want to consider paying your taxes quarterly to stay on top and have smaller payments each time you pay. Organization is a big key in maximizing your results and being able to recall amounts when needed. Be prepared to spend money on whatever organizational type of equipment you have to. It is well worth the investment.
Check into automatic savings programs that will automatically withdraw money from whatever account your monies received are transferred into into a separate account without the worry and hassle. One recommendation of such program is ING direct savings accounts to where you can set up automatic withdrawals or automatic deposits with the click of your mouse. ING Direct has a higher annual interest rate and maximizes your business savings. You can also do one click banking to transfer amounts at the drop of a hat to provide for extra cushion to soften that IRS blow that can come at tax time.
For married couples you may want to check into where the benefit will lie with your filing status whether you file joint or separate. You do not have to have an employer identification number, a social security number will work just the same. Most independent contractors will fill out the information for both types of filing to see where they stand for each status. It does take a little longer however the savings can, in some cases be worth that extra time since you are doing your taxes anyway.
Just remember if it justifies your business existence it is deductible. The expense might not be the full amount, however, the smallest portion can still be considered to make your annual tax preparation more of a pleasant surprise than a tragic mistake.