When it comes to paying taxes, no one likes surprises. It’s nice to know up front an estimated amount of taxes you’ll owe and be prepared to pay accordingly. If you are self-employed and/or a contract worker, AKA a 1099 worker, it’s essential that you keep track of all invoices and payments. This will help alleviate headaches later on down the road when you want to organize a year’s worth of financial information.
As an employee, you are scheduled on regular pay periods with a human resources or payroll department keeping tracking of how much to deduct from your paycheck each month. At the end of a tax year, you receive a W-2 with a total of your withholdings and are able to record that information easily onto your tax form. In general, this is a pretty simple process.
As someone who is self-employed, or a contract worker, it works much differently with regards to taxes and can become overwhelming. Things to keep in mind to stay organized:
- Pay schedules may vary from month-to-month (plan budgets accordingly);
- You may be paid different amounts for each project;
- You are responsible for deducting your own taxes; and,
- You may be subject to a self-employment or business tax.
You should still receive tax documents at the beginning of the year from the individual or business you provide services for, but by keeping track of all payments, you can cross check for accuracy.
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Another thing you will have to consider is if you’re filing as a self-employed individual or a small business. It’s a smart idea to hire an accountant or a tax preparer who has experience helping both categories of taxpayers and can give any guidance needed. It makes a difference for how you’re seen in the eyes of the IRS and what taxes you are responsible for paying. This will also determine if you’re eligible for any special deductions or tax breaks, which can be helpful to reduce the final amount owed.
One problem many 1099 workers face is not paying on a quarterly basis. To avoid this from happening to you and to help keep track of tax payments, there are forms that you can download from the IRS website to pay estimated taxes every three months. Basically, this is a way to pay taxes of what you think you might owe, based on income the previous year, while you’re self-employed. This will prevent you from owing more than expected in April and also prevent any tax penalties for late payments.
There are also business deductions that aren’t available to regular employees that you may take advantage of such as travel expenses, home office equipment and marketing costs. It’s easier to be the target of an audit with these types of deductions, but just make sure you have receipts to prove these expenses and how they are applicable to your work life.
If you did not save for taxes and you now owe hundreds or thousands of dollars that you cannot pay all at once, you may want to discuss your financial situation with a tax debt relief company. Depending on your specific situation, you may be eligible for a payment plan or they can provide offer in compromise assistance.
An offer in compromise is a type of program which can save you money on taxes owed, as long as you’re eligible through the IRS. It involves making a single payment at a smaller percentage of your original balance. If you’re looking to reduce your debt or want to learn more about your options, it’s good to go with a professional. They can be your communication with the IRS and work on any negotiating that may be required. Gather all the financial documents you have and determine how much you can budget per month to start paying back your taxes.
Being a 1099 worker comes with its own level of professional freedom, but also an extra level of responsibility as well. The best advice is to maintain accurate and up-to-date financial records, which includes all business-related receipts. Prepare for tax payments and research resources to help out when needed. Don’t be afraid to ask questions. The sooner you can come up with a sound financial plan, the better. Consider checking out these apps to help you stay on top of your finances and be better prepared.
What challenges/benefits have you faced as a 1099 worker?