One of the advantages of being a contractor is you typically work on your own terms; determining the best way to handle projects, rather than following an employer's direction. Having the freedom to work at your own pace and discretion can be ideal if you're self-motivated. But an important responsibility you shoulder as your own boss pertains to how you handle your taxes.
Among the many tasks for which you must hold yourself accountable as a contractor includes estimating and paying your taxes. This duty is not to be taken lightly, as errors or oversights can result in protracted IRS issues. As you're evaluating your career choices, consider the tax implications that come with the independent path.
As a regular employee, your company or business owner is responsible for withholding and paying taxes from each of your paychecks. By contrast, your role as an independent contractor excludes your employer from this responsibility. As such, it falls to you to correctly estimate and pay your taxes in a timely fashion.
Rather than simply filing a tax return on April 15th as you would if you were a typical employee, you're expected to report and pay quarterly throughout the year, on the following dates: January 15th, April 15th, June 15th and September 15th. It's critical to include all payments you received during the timeframe in question and prevent overlooking any employers (if you worked for more than one party). It's definitely a good idea to keep a careful record of any payment transactions along with work expense receipts.
Since you're solely liable for all of your taxes, your bill to the Treasury Department can quickly become expensive. You can curb this balance by itemizing your deductions for valid work-related expenses. What you spend on job necessities such as materials, equipment, uniforms and travel costs can be written off. Whatever you're deducting, you have to make sure that it will be allowable and you have the documentation to validate each expense. Reporting errors can be costly.
There are a few things to watch out for when you're responsible for your own tax reporting. First and foremost, it's critical to meet your quarterly deadlines for estimating and paying your taxes. You may be inclined to handle this once a year on April 15th, but this generally is not a good idea.
Since you're required to file quarterly, the IRS can assess penalties and interest if you miss any due dates. These additional fees can quickly inflate your balance. It will also likely be more difficult for you to settle a giant tax bill for the entire year at one time, rather than paying it incrementally. Once you get behind on your tax payments, catching up can be a legitimate challenge. Finally, when it comes to work expenses, you have to be certain that you have documentation for every one you want to deduct. If you're unfamiliar with this process, you may not want to initially handle it alone.