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When it comes to taxes, self-employed consultants take the good with the bad. And in this, the first year under the 2018 Tax Reform Act, you may not know if being a consultant was a good thing or not until the final tax bill comes due. When fleshing out your final tax bill for the 2018 tax year, keep these three tips in mind.
It's very important to make sure that you're a self-employed consultant before you decide to start paying taxes like one. The Internal Revenue Service (IRS) has a webpage specifically dedicated to determining this classification. Generally speaking, if you carry on a trade or business as a sole proprietor or an independent contractor, or are part of a partnership involved in a trade or business, you are considered self-employed by the IRS.
However, just because you or the company you perform work for calls you a contractor doesn't mean that the IRS agrees. In the current economy, many large companies have a majority of their workers classified as contractors, but this just means they contract with another company for that worker. The worker is in fact an employee of the contracting company. If this is all very confusing for you, one way to determine if you are a consultant, and therefore self-employed, is to take a look at the tax form you receive at the end of the year from the entity sending you checks. If you receive a W-2 form, you are generally considered an employee. If you receive a 1099, you are probably a consultant.
If you are indeed a self-employed consultant, you should make sure that you are paying your taxes quarterly, and understand that you must pay an added amount for FICA, which is generally social security and Medicare tax.
When you are employed, your employer covers one half of these payments and you would cover the other. But when you are self-employed, you are the employer and the employee, and therefore you have to pay both halves of FICA, which will run you about 15 percent of your wages, up to a certain limit. On the other hand, there are a host of great tax deductions you can take as a self-employed consultant, such as expensing your laptop, transportation to and from work, internet and phone bills, and even health insurance expenses.
There are plenty of other very valuable deductions worth researching, but some can get rather messy, especially when you enter the area of depreciation, which requires outstanding bookkeeping. But they may definitely be worth your while.
Quarterly payments for tax year 2018 were due April 18, 2018, June 15, 2018, September 17, 2018, and January 15, 2019. If reading this information has your adrenaline pumped because you only now realize that you have these extra payments to the IRS, don't despair! Generally speaking, the IRS won't impose any sort of penalty if you have already paid 90% of your taxes prior to April 15th. If you feel you are under the 90% threshold, here are two things to consider.
First, if you file your return by January 31, 2019, the IRS won't consider your 4th quarterly payment late, even though it was technically due on January 15th. And if you can't get your taxes together by then, consider making a "late" quarterly payment as soon as possible. Even though quarterly payments were due months ago, you will still only be assessed a late fee from the date of the missed payment. Waiting until April 15th to pay will only make your penalty higher.
If you have any questions about taxes at all, whether it be for self-employment taxes or any other issue, contact a tax attorney. You may already be sweating bullets that you owe more taxes than you think, but talking with a tax attorney may open up new tax deductions, and save you from some painful conversations with the IRS.