If you are an independent contractor, doing your taxes can be especially challenging. When we work with clients who are independent contractors they either avoid deductions out of fear of the IRS, or they go the other way and look for ways to cut those taxes that can get them into trouble.
The most common errors independent contractors make that should be avoided
Don’t leave money on the table, Part 1:
With today's challenging economy, many independent contractors have been having more down years. That might not be such a bad thing, tax-wise. Why? In this case, a loss can be a good thing. You can offset gains from years ago with your loss this year, but you need to handle things correctly.
Make sure your CPA knows about that loss so he or she can account for it on your taxes properly. This is especially important because there is only a limited amount of time that you can carry that loss back. So don‟t waste time or you may just be leaving money on the table by paying higher taxes than you need to.
Don’t leave money on the table, Part 2:
A lot of contractors do pay more than their fair share because they are afraid of taking legitimate deductions. This is especially true if they don‟t work with an accountant who is experienced with independant contractors. If it is an expense that is somehow related to your business, chances are it most likely will be deductible.
Different accountants have different interpretations of this issue. Some will be more conservative than others. Contractors need to find a CPA who matches their risk profile. It‟s ok to get a second or third opinion from a CPA or tax attorney. They should be familiar with your line of work.
Don’t Let Estimated Payments Get Away From You:
Self-employed contractors are required to make estimated tax payments, and these are tough to calculate. It can be really difficult to get the number right and independent contractors often end up owing taxes. This is especially common when business is slow when contractors simply don't put enough aside for the IRS throughout the year. They get to tax time and they can‟t pay that number all at once, so, they just don‟t file.
Because it takes the IRS so long to figure out that the contractor owes money, the contractor often thinks the IRS might not notice the oversight. The contractor then compounds the problem by not paying all taxes, thinking he is off the radar. Eventually, though, the IRS will catch on and the contractor has a serious problem.
The IRS can levy the contractors' accounts receivables and/or shut the business down. It is a huge snowball of a disaster that is all started by simply not putting enough money aside for estimated payments.
Don’t Avoid Filing Because You Owe Money:
There are alternatives if you owe more than you can pay. Not filing is a bad way to handle this situation. First and foremost, it is a crime not to file returns. Second, your penalties and interest increase if you do not file and the IRS catches you. If you owe taxes you should at least file. Then, call the IRS. If the amount you owe is below $10,000 (and in some cases $25,000), the IRS has to give you a payment plan by right.
Your interest rate and penalties will be much lower with this kind of installment agreement than if you just ignore the problem by not filing. If the amount you owe is higher, the IRS may demand all the money all at once. For those cases you may want to consult with a tax attorney to discuss negotiating better terms or seeing if you can lower the amount owed by filing amended returns or using the offer in compromise program.
Don’t Skip Making Your Federal Payroll Deposits:
When an employee has payroll taxes withheld, it is the duty of the employer to hold on to that money and then send it the IRS. We have seen independent contractors get in trouble with this thousands of times.
Here‟s how it goes: Cash flow is tight so the contractor thinks, "well hey, there‟s this money I have from the employees withholding that's right there that I can use. I'll just borrow it until I get some money in.‟ Doing this is actually a crime. In this case, the contractor is using money that really belongs to the US government.
What we often see when this happens is the employer is always playing catch-up to repay those funds. The problem can pyramid until it is out of control. Those payments don't come in to the government, and if they are in arrears for six months the IRS can charge what is essentially a 140% penalty. We've seen missed deposits of $10,000 turn into $24,000 in six months. That is one heck of an interest rate that needs to be avoided.
About IRSMedic
IRSMedic is a practice of tax attorneys that works to resolve tax issues for businesses and individuals. These issues can range from unfiled taxes to audits, liens, penalties, and other IRS actions. Attorney Anthony Parent founded the firm in 2003 to help clients deal with difficult tax problems. He combined an academic background in finance with a law degree to develop the foundations of the practice. If you need assistance, contact us at 888-727-8796 or email info@irsmedic.com.
