This is a guest post written by Tristan Zier, a former CPA and founder of Zen99, a website designed to help independent contractors manage their tax obligations throughout the year to avoid last-minute catastrophes, frustration, and fines.
Let me start by saying that I didn’t plan to start my businesses. I mean, I was a CPA working for Deloitte, so that’s pretty much the opposite of small-business ownership. But eventually I, like many people who start businesses, decided I wanted a little more freedom.
And while that trajectory toward small-business ownership is far from unique, it’s not the only way people end up as small-business owners. Some people get laid off from a full-time job, or can’t find work after graduating from school, or decide they want (or need) to start working again after retiring. Some people moonlight.
As far as the IRS is concerned, every one of these people is considered a small-business owner.
Unfortunately, layoffs don’t typically come with tax guidelines for working independently. And the last I checked, most technology training courses don’t offer help with filing quarterly returns or classifying business expenses.
But for people working independently, the stakes for filing taxes improperly are high: if you miss the IRS’s four annual tax deadlines, you could be responsible for interest and penalties of between six and eight percent of what you owe. Ouch.
So how many people are affected by independent worker tax requirements? More than you might think:
Tax Tips for Freelancers, Independent Contractors, and Small-Business Owners
Here are some ways to keep your taxes under control so you don’t have a mess on your hands at tax time.
- Understand what “1099” status means. Even if the majority of your income comes from a single client, you’re not an employee if you’re (properly) classified as a 1099 contractor. As a 1099 worker, you are not eligible for employee benefits like healthcare and Workers’ Compensation Insurance. In addition, 1099 status means that your client does not pay taxes on your income. It’s up to you to pay the IRS those taxes, including income, Medicare, Social Security, and others. That means you have to know how much to send to the IRS.
- Keep track of your income weekly. Naturally, the amount you’re required to send depends on how much you bring in. The best way to keep track of your revenue is to keep track weekly. This will help keep you in touch with your cash flow and know when to reach out to clients who are late with payments. It will also make paying quarterly taxes easier (see below).
- Track your expenses daily or weekly. Tax requirements also depend in part on your expenses. Many business expenses are partly or completely deductible, meaning that keeping track of them is a great way to potentially save money on your tax bill.
- Pay your quarterly taxes. Rather than paying taxes once a year in April, independent contractors are required to submit payments four times throughout the year. Quarterly taxes are due for 1099 workers on April 15, June 15, September 15, and January 15. The IRS likes people to submit four equal payments, so you have to calculate your estimated yearly tax payment and divide it by four to determine your quarterly taxes. If you don’t pay taxes every quarter, you’ll likely face an underpayment penalty in April.
Making Taxes Less Burdensome
After leaving Deloitte, I worked at a business called Exec, which was like the Lyft or Uber of cleaning services. We sent independent workers to places that needed to be cleaned, and business was booming (we later sold to a company called Handy). I loved the business, but working with independent contractors made me realize that they have to handle all their bookkeeping and tax work by themselves, without the support structures that come with a full-time job.
So a few months ago, I launched my newest venture, Zen99. The site offers free software for independent contractors to track their earnings and expenses, estimate and minimize taxes, and get personal lines insurance.
For more freelancer tax tips and to check out Zier’s newest venture, visit https://www.tryzen99.com/.