As an independent contractor, you can claim tax benefits specific to self-employment while filing your returns. Organizing records and paying estimated taxes, for example, can help you avoid overwhelming stress or an exorbitant tax liability and penalties. The following guidelines help independent insurance agents understand tax advantages and how to properly prep for tax season.
First, confirm your independent contractor status with the IRS. The IRS defines independent contracting as when a business controls or directs the work results performed by a contract employee, and the employee manages how the results are accomplished. Ensure that your contractor status follows IRS regulations by filing the SS-8 form. Determining your status helps avoid liabilities and tax penalties.
Tax deductions relate to the cost of your work, which is why proof of expenses and thorough bookkeeping is essential. The goal of bookkeeping should be to prepare detailed reports that support your tax return. Use Mint or Quicken for automated and simple bookkeeping, suggests Career Builder. Developing a filing system for categorizing and tracking receipts can save a lot of time. Receipts will back up claimed deductions. Traveling expenses and business-related mileage count, too. Going to the bank to deposit a client’s check or making hotel reservations for work-related traveling can qualify for tax deductions.
Will your tax liability be more than $1,000 during the year? If so, pay taxes quarterly, which is in April, June, September and January. Create a tax savings account and automatically make savings deposits with each paycheck. Tax preparation software can also help you track estimated tax payments. TurboTax tracks estimated tax payments, prepares tax forms and provides e-filing. Quicken automatically calculates deductions and controls your finances by estimating tax payments. Intuit payroll tax specifically “withholds the correct payroll taxes from each paycheck,” describes Intuit. You can rely on Intuit Online Payroll for paying and reporting payroll taxes, as well as completing payroll tax forms. Money-management software can also manage separate business and personal accounts, which optimizes the organization of your overall expenditures.
Individual retirement plans, property (such as your home) used for business purposes and indirect or direct work-related expenses can qualify as tax write-offs. Set up an individual 401(k) to make contributions as a 401(k) deferral, plus a certain percentage of net income. John L. Hillis, president of Hillis Financial Services, asserts retirement plans as the absolute No. 1 tax deduction, especially because “the government is helping fund retirement,” according to TurboTax’s Tax Tips.
Along with retirement, housing costs and direct work-related expenses can be deducted, including costs of Internet, phone services, postage and supplies. Even utilities, an indirect expense, can be incurred as an essential part to perform your job. You are a home-based contractor eligible for home-office deductions if you primarily work at home and designate an exclusive space for insurance business. Health care insurance costs, auto expenses (such as registration, insurance and maintenance) and professional service fees are also possible deductions.
Lastly, keep in mind the following tax tips:
- Carefully review 1099s to ensure payments submitted to the IRS from clients actually match what you were paid;
- Net expenses in detail using Schedule C;
- Pay self-employment taxes, including Social Security and Medicare, on Schedule SE; file for a deductible using Form 1040.