This tax season we saw an increase in clients who took side jobs with companies like Uber, Lyft, and UpWork. In this month’s newsletter, we’ll take a deep dive into the new “gig” focused economy that many “regular” wage earners are playing a role in.
What a lot of folks forget about – until it’s too late – is that this income is taxable and, come Tax Day, normally April 15th, a lot of these contractors were blindsided with tax bills they never saw coming. In reality, few things in the world of small business are as misunderstood as the simple status of being a contractor. Large corporations try to limit their liability illegally by claiming that employees are actually contractors, your clients often take months to pay your invoices, and at the end of the year, you wait patiently by the mailbox for your clients to issue you a Form 1099.
Despite the challenges, the simple fact is that business entities and individuals can only receive income in two ways – either as W2 employees or as 1099 contractors. So the importance of processes for your contracting business cashflow can’t be overstated.
To put it bluntly, if you wait for your clients to send you a 1099 in February, you are in trouble and likely will owe the IRS even more in fines or penalties.
Now, we’ve been covering the many ways in which business entities are responsible for paying quarterly taxes. Today, we’re going to look at how Contractors need to project and handle their quarterly tax payments, even if they haven’t got all the information on their income yet. It’s kind of a formula of one part magic and two parts accounting.
First things first – “how” you pay your quarterly taxes is going to depend on how you have structured your company. A Single Member LLC will have different standards than an S-Corporation. This has a direct effect on where the money comes from, how it is calculated, and any additional taxes you’ll be responsible for – personally or professionally.
The biggest concern and most pressing need, then, as a contractor, isn’t “how” to pay your quarterly taxes – or even “when” – it’s understanding how to calculate them and ultimately, that makes it an accounting issue.
Now, as a general rule, 1099 contractors have 2 choices when it comes to calculating quarterly taxes: they can use the data from the previous year or they can track data from the current year with real-time projections. Both schools of thought have their adherents and detractors, but as small business owners ourselves, we’d like to say this…
Why would you only want to be as good as you were last year?
Certainly using the previous year’s data can keep more money in your pocket during the fiscal year and then you would merely pay any difference when the annual taxes are filed, but what is the result if you really nail sales this year?
Yep – a tax problem. Of course, the good news is this. By understanding where your business is every day versus the same day last year, you can easily project what that impact will be on your quarterly taxes. Remember, too, that if those estimated taxes are less than $1,000, you won’t necessarily have to pay each quarter.
Professionally, we like to work with real-time data. As tax professionals, that means we want to know what expenses and potential write-offs and deductions our clients can take and project right then into their estimated taxes. At the bare minimum, we suggest that any 1099 contractor diligently track and collect earnings (in the form of pay stubs, or invoices) and the costs of doing business; in other words, tracking expenses. Common expenses include anything that is “ordinary and necessary for your business” such as:
- Office expenses
- Meals with clients
- Business software
For you, personally? It is important to understand what your liabilities will be each quarter, too. Remember, as the contractor, you’ll still have an individual return to file in addition to any company returns. A misunderstood secret in all this is the role that solid financial reporting can play. Sure, we all know people who simply stuff receipts into a shoebox and try to sort it all out at the end of the year. However, retaining a tax professional is a great way to mitigate how much time and effort you personally have to spend sorting out these items. When you factor in how valuable your time is, is managing your own books really the best way for you, as a 1099 contractor, to spend your time?
Of course not.
Me and the team are here for you and a huge part of our goal is to keep more money in your pocket. If you are taking part in the many different contracting jobs available today – even Air BNB – then understanding your tax liabilities is critical. Take some time to come in and let’s game plan how to manage any quarterly payments.