Independent Contractors Prepare for Tax Season

How Independent Contractors Can Prepare for Tax Season

If you are filing taxes as an independent contractor or small business owner, it’s likely that your taxes are a lot more complicated than the standard W2 employee. That’s why it’s a good idea to get started on compiling the information you will need to file your taxes or send to your tax return preparer.

  • Step 1: Gather and organize your tax documents
  • Step 2: View your tax information online
  • Step 3: Learn about new changes to the tax law
  • Step 4: Decide how you’ll file your taxes
  • Step 5: Start looking at credits and deductions

Get ready now to file 2023 federal income tax returns in early 2024

Preparing for tax season is crucial for independent contractors for several reasons:

  • Compliance: Meeting tax obligations is not just a legal requirement but also ensures compliance with tax laws. Proper preparation helps avoid penalties or legal issues related to incorrect filings or missed deadlines.
  • Financial Planning: Being prepared allows contractors to anticipate their tax liabilities. Understanding what they owe enables better financial planning throughout the year, ensuring they have funds set aside to cover their tax obligations.
  • Maximizing Deductions: Through proper preparation, contractors can identify and take advantage of eligible deductions and credits. This can significantly reduce their taxable income, ultimately lowering the amount they owe in taxes.
  • Avoiding Stress: Tax season can be stressful, especially for those unprepared. Having everything organized and ready ahead of time minimizes stress and allows contractors to focus on their work instead of scrambling to meet tax deadlines.

Consulting with a tax professional can also be helpful to ensure compliance with tax laws and to maximize deductions.

Step 1: Gather and organize your tax documents

Pulling together all of the miscellaneous forms you need to file your tax return is probably the biggest step. But, once you have everything organized, it will make filing a complete and accurate tax return easier.

Below is a list of some of the personal and business documents you will need to file your tax return. This is not an exhaustive list – and the information you will be required to provide on your tax returns is ultimately based on your individual situation.

Personal documents:

  • Full names and Social Security numbers, or tax identification numbers, of you, your spouse, and your dependents.
  • Another form of identification to prove that the Social Security information is yours, such as a driver’s license, passport, or state identification card.
  • Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance payments or claims Premium Tax Credits for 2022 Marketplace coverage.
  • Form 1098-E: Student loan interest statement.
  • Form 1098-T: Tuition statement if you paid for post-secondary education.
  • Form 1098: Mortgage interest statement shows the amount of interest you paid during the year, as well as property taxes your bank paid from your escrow account.

Business and income documents:

  • A copy of last year’s tax return.
  • Form 1099-NEC: Non-employee compensation is the form independent contractors would likely receive from their clients.
  • Form 1099-K: Payment card and third-party network transactions like Venmo, PayPal, Upwork and Zelle.
  • Form 8829: Expenses for business use of your home.
  • Form W-2: Wage and tax Statement if you have an employer.
  • Form 1099-R: Distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc.
  • Form 1099-DIV: Dividends and other distributions.
  • Form 1099-G: Certain government payments like unemployment compensation benefits.
  • Form 1099-INT, Interest income showing interest paid to you throughout the year.

Remember, most income is taxable. As an independent contractor, you only receive a 1099-NEC from a client if you were paid more than $600. However, you are required to report all income even if you don’t receive that form.

Step 2: View your tax information online

If you haven’t done so recently, you should log in to your IRS Online Account to make sure everything looks good. You can verify that your quarterly payments were received, check to see if you have a balance, make payments, manage your communication preferences from the IRS, and more.

Step 3: Learn about new changes to the tax law

The IRS routinely adjusts tax codes, introduces new regulations, and amends existing rules, making it essential for individuals, including independent contractors, to stay informed about these changes.

For example, more people may be eligible for Premium Tax Subsidies thanks to a new Administrative Rule. You can learn more about the “fix” to the Family Glitch Loophole.

Step 4: Decide how you’ll file your taxes

There are two main ways to file your tax returns: on your own or with the help of a tax professional. If you opt to file your own taxes, take some time to research the different options and compare prices. The IRS offers a free fillable form, but you need to know how to prepare your own tax return using form instructions and IRS publications.

If you decide to hire a tax professional, you will need to figure out what kind of tax preparer you need. Anyone can be a paid tax return preparer as long as they have an IRS Preparer Tax Identification Number (PTIN). However, tax return preparers have differing levels of skills, education, and experience. The IRS offers a lot of great information on choosing a tax preparer.

The IRS also offers free guided tax preparation for taxpayers whose adjusted gross income is $73,000 or less through the Free File Program. The non-profit, public-private partnership is dedicated to helping millions of people prepare and file their federal taxes online for free.

Step 5: Start looking at credits and deductions

It’s important to look at the available credits and deductions because some have specific requirements. For example, if you want to claim a home office deduction, you will need to fill out Form 8829: Expenses for business use of your home.

Tax Season starts January 2024

The 2023 eFile Tax Season will begin in late January 2024. That gives you less than three months to get everything ready which is why some year-end prep work can go a long way. Start organizing your finances now so you can file your taxes well before the April 15, 2024, deadline. You’ll be happy you did!