Tax Preparation Services May Deliver Surprises to Taxpayers With Contract Income
With so many families still living on tight budgets, some individuals earned a little extra cash last year by freelancing. This type of work entails short-term projects for a set fee. People who are accustomed to working only as employees are likely unfamiliar with the tax consequences of independent contractor status. Consequently, a part of tax preparer jobs is delivering potential surprising news about taxes owed.
Working as an independent contractor results in additional income tax plus self-employment tax. Because the combination of these taxes is paid to the IRS, the calculation for both is a process in registered tax return preparer work. For some people, the self-employment tax is as much as the regular income tax. The aggregate total tax often exceeds 30 percent of contractor income.
Fortunately, self-employed individuals are not necessarily taxed on the total amount they received from contract jobs. They are entitled to deduct related expenses. The process of limiting taxable income by reporting legitimate expenses is a valuable deployment of knowledge from RTRP study.
All ordinary and necessary expenses are deductible from self-employment income. Mileage to reach a location for performing contract work is deductible. This contrasts with the prohibition of deducting commuting miles from home to work as an employee. Individuals who submit work over the Internet can deduct the cost for web access. Office supplies used exclusively for self-employment are also tax-deductible.
Some special tax rules are applicable to home offices and computers used by independent contractors. Professional tax preparation services understand how to help people meet the requirements for these deductions.
Techniques are available to avoid owing so much tax on self-employment that a penalty is triggered. Although full-time self-employed individuals must pay estimated tax payments during the year, part-time independent contractors with jobs as employees have another option. Individuals who know they will have some self-employment income can increase their withholding on wages from work as employees. The higher withholding covers taxes on their contract work.
The adjustment necessary on the employee W-4 is an extra withholding amount per paycheck. Calculation of a safe harbor minimum annual withholding is addressed in RTRP continuing education. Fortunately, the IRS gives a break in the first year of additional taxes relative to the preceding year. Taxpayers must have simply set aside some of their contractor income to pay the IRS with their tax returns. A new safe harbor figure is then determined each year.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.…