Income, expenses, and deductibles: Here's what you need to know to stay on top of your tax returns!

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Recently, I read an article from the Financial Times (FT) titled, “Money Clinic podcast: Get on top of your tax return.” I found this topic relevant because about a month from now, many of us would have to file our tax returns again. The FT article talks about the key guidelines for filing taxes in the UK. It also answers some of the frequently asked questions about taxes and provides tips on how to make the whole process easier. Today, we’ll be doing a version of that article but with a focus on the US audience. Since many of our readers are from America, we believe it’s fitting to equip them with knowledge about this topic in time for the filing of tax returns. Keep reading to know how you can get on top of your taxes. With sufficient knowledge about these things, you’ll manage your finances more efficiently. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Income, expenses, and deductibles: Here's what you need to know to stay on top of your tax returns! Being an independent contractor comes with a lot of freedom. You can: Choose how you want your schedule to look like Work wherever you like Select the clients you want to work with … and the list goes on. In fact, according to MBO Partners’ 2021 State of Independence in America report, the number of independent workers in the country grew from 38 million in 2020 to 51 million in 2021. That means around 35% of the US workforce is made up of independents now. However, being an independent professional also has its fair share of challenges. These could include figuring out how to get clients or setting your rates effectively. One of the biggest challenges you might face as an independent is learning how to pay your taxes. If you previously had a traditional job at a company, you might still be accustomed to having your employer automatically deducting taxes from your paycheck. But! Once you shift to an independent career path, you have to make adjustments and own up to the responsibility of staying on top of your tax obligations. Simply said, you have to learn how to file your tax returns on your own. Here’s when each quarterly payment is due this US tax year: April 15, 2022 June 15, 2022 September 15, 2022 January 15, 2022 It’s important to stay on top of each quarterly payment to avoid late penalties. If you miss the deadlines or don’t make sufficient payments, you could face an interest charge of 3% as per the IRS’ (Internal Revenue Service) October 2021 data. Below are a few tips to help you stay on top of your tax returns: Stay organized all year round. Tax time is stressful for some independent contractors… but that doesn’t have to be the case all the time! To make the entire tax process smoother for you, make it a habit to keep a clear record of your income and expenses as they happen. This could mean updating your records daily, weekly, or monthly depending on your circumstances. Keeping track of your records shows you’re taking care of things while they’re fresh on your mind. This will prevent you from getting overwhelmed with a mountain of disorganized information at the end of every quarter! Make sure your tax-related documents are prepared and complete. As an independent contractor, there are a few documents you need to be familiar with: 1099 Forms Your income statement A record of your expenses Instead of the W-2 form you get from employers, expect to receive the 1099-MISC Form or 1099-NEC Form from each client who paid you USD 600 or more for a particular tax year. If a client pays you through PayPal or any similar service, expect to receive the Form 1099-K. What tax form do you need to fill out? You must report all your income and expenses through the Form 1040. Here’s how to do your taxes using the form: Part I of Form1040 - This is where you report your income, including the 1099 forms you received from your clients. You also need to input any other income you received as an independent, regardless of whether or not you received a 1099 form for it. Part II of Form 1040 - This is where you report all of your expenses throughout the year so you can claim your deductions. Once you’ve filled out all the documents and forms, you may send them to the IRS together with your quarterly payment. Consider working with a tax expert. Working with a tax professional or a Certified Public Accountant (CPA) may pay off well for you―not just in terms of helping you figure tax-related things out but also in terms of helping you lower your tax burdens and avoiding potential penalties. If your tax status stays consistent throughout the year, doing things on your own is a good idea. Just make sure your records are regularly updated, as discussed in point #1! On the other hand, if you have multiple income streams or you work across different state lines, you might want to consider talking to an expert. A good tax professional will help you identify deductions and save money in the long run. Know your deductibles. Independents can claim various deductions to reduce their tax burden. However, some are not aware that they can. In other words, many independent workers are paying more than they have to in taxes. Although you have to pay both self-employment tax and income tax to the IRS, the upside is you can rightfully minimize your tax burden by claiming deductions. Take note: The IRS defines deductions as “both ordinary and necessary for the function of your business.” So, think about that before claiming your morning coffee as part of your deductibles. Here are some of the most commonly accepted deductions for independent professionals: Home office space Office supplies and equipment Your work phone bill Fees for a workspace membership Vehicle expenses or gas Business meals Software and website hosting fees Marketing and ads Licenses and certifications Professional memberships Legal and professional services Keeping a clear record of your deductibles along with your income and expenses is handy when tax time comes. If you think you are eligible to claim several deductions but aren’t sure how to go about it, working with a tax professional can be helpful for you. That's it―a few simple tips to help you make tax time smoother and more convenient! Remember to keep a folder of your tax forms, documents, and other financial records for easy referencing. Make sure you take advantage of your deductibles too. With planning and organization, you’ll make staying on top of your tax returns easier. This will also save you a great deal of time, money, and headaches. We hope you’ve gotten a lot of useful information from this article! Keep in mind that learning how to properly do your taxes as an independent professional is one part of building a successful and thriving work. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! What do you think is the goal of successful investing? Learn more about the first discipline of the investing giants in next week’s article!