With the recession and surging unemployment swelling the ranks of people reinventing themselves, millions of taxpayers are setting up home-based businesses and providing their services as self-employed independent contractors. Whether your new self-employed independent contractor status is a temporary measure or part of your long-planned road map to fortune and glory, there are tax dangers (plus surprisingly lucrative income tax relief) that should grab the attention of every self-employed independent contractor.
We know the IRS is targeting self-employed independent contractors. The government estimates that 85% of the $345 billion tax gap is due to self-employed individuals - freelance professionals and independent contractors who don't get a 1099 the way large business employees do. Being a self-employed independent contractor means you're the boss, unfortunately it also means you're the one on the hook for any problems with back taxes. How you handle your back tax problems will not only determine whether your business will succeed, but it also carries the real threat of jail time if you get it wrong.
Read on for these tax help tips to show self-employed independent contractors how to get the biggest income tax relief possible.
Self-Employed Independent Contractor Income Tax Relief Tip #1: Structure your business to get the maximum income tax relief before the year end. Did you owe back taxes because you made a mistake in your quarterly estimated taxes? If you've spent your life working as an employee, you may be delighted that the first money you receive as a self-employed independent contractor is a flat fee without any taxes taken out. But your joy should be short-lived, this is a case of the taxman being delayed but not denied. Before you start, you should contact a tax attorney to make sure you have structured your business correctly.
Self-Employed Independent Contractor Income Tax Relief Tip #2: Find out if YOU really a self-employed independent contractor. Many businesses (large and small) mislabel their employees as "self-employed independent contractors" to get income tax relief and sidestep a host of state and federal laws. The IRS has a comprehensive page on their Website to help determine whether you're an employee or a true self-employed independent contractor. If your boss has you misclassified as a self-employed independent contractor and you file as one, you could be in a heap of trouble when the IRS comes knocking on either your door or your boss's door to collect back taxes. Suddenly, all those lovely deductions go out the window and your tax bill explodes. If you feel your boss has misclassified you as a self-employed independent contractor, contact a tax attorney or tax resolution specialist immediately for some self-employed independent contractor back tax help before the year ends.
Self-Employed Independent Contractor Income Tax Relief Tip #3: Establish whether your subcontractors are self-employed independent contractors or employees. Are your subcontractors really self-employed independent contractors or are THEY employees? While you may be a true self-employed independent contractor, you need to establish whether your subcontractors are self-employed independent contractors or employees. According to IRS Summertime Tax Tip 2009-20, "the cost of mis-classification to employers in additional taxes, as well as administrative time, or the loss of tax-favored status for employee benefit plans, can be steep." If you're not sure, contact a tax attorney or tax resolution specialist to get tax help immediately.
Self-Employed Independent Contractor Income Tax Relief Tip #4: Defer getting paid until next year. Want to get income tax relief on your self-employed independent contractor work by delaying paying taxes until later? For a host of income tax relief reasons, a self-employed independent contractor might want to defer getting paid until next year. If you did work in 2010 but don't want to pay 2010 taxes on it, simply wait to invoice your clients until January 1, 2011. This income tax relief technique is perfectly legal for self-employed independent contractors as long as you pay taxes on that income in your 2011 tax return.
Self-Employed Independent Contractor Income Tax Relief Tip #5: When it comes to medical expense deductions, timing is everything.... The secret to income tax relief is just like the secret to great comedy...timing. A self-employed independent contractor's medical expense deduction is limited to 7.5% of the self-employed independent contractor's adjusted gross income. If you haven't reached that cap yet, go have those dental procedures or that bit of elective surgery (we're not just talking about that nose, the swimsuit season will be here again before you know it). As long as you're under that 7.5% limit, you can get income tax relief from your standard variety medical expense deductions. A little known year-end income tax relief tip - you don't even have to pay for the medical procedures before January 1. As long as you had the procedures in the current tax year, the deduction is good.
Self-Employed Independent Contractor Income Tax Relief Tip #6: Pay your state taxes before December 31. As a self-employed independent contractor, one of the best income tax relief strategies is to pay your state estimated tax before December 31st. By doing this, you get the deduction (on your federal return) for the current tax year. If you are having issues paying your estimated state taxes, a tax attorney can give you tax help to get the maximum income tax relief possible.
Self-Employed Independent Contractor Income Tax Relief Tip #7: Make your stock market losses work to your advantage. If your personal portfolio has taken a nose dive, realize your tax losses before New Year's Eve. Long term capital losses can be used to offset long term capital gains, and up to $3,000 of ordinary income, with any remainder carried forward for use in future years. This is about getting income tax relief not whether you made the right investment choices. If you still believe those stocks will go up again, buy them back on January 1st. Keep in mind that some mutual funds can have high capital gains distributions even as they lose money. The best income tax relief advice is to ditch these first because they are hitting you with a double whammy. As a self-employed independent contractor you have access to some of the best retirement accounts out there like a SEP-IRA. To understand which investing should be done as part of a retirement account, and which should be in your personal portfolio and when to take losses for maximum income tax relief, get tax help from an experience CPA or tax attorney.
Self-Employed Independent Contractor Income Tax Relief Tip #8: As a self-employed independent contractor, you can give a friend or family member up to $13K annually before the year end without having to pay gift taxes. (Your spouse can give that same amount to the same individual.) You can also give that same amount to your child's or grandchild's tax-free 529 education plan. If you haven't funded such a plan yet, you can make a single contribution covering five years of gifting. That's $65,000 you can give per donor per recipient tax-free. (Your spouse can match that contribution as well.)
Self-Employed Independent Contractor Income Tax Relief Tip #9: Give thank you gifts to clients! Gifts to clients are limited to $25 per recipient per year, BUT if the gift has your embossed logo on it and tells about your services, it isn't a gift, it is an advertising or promotional expense. There is a fine line here, a quick call to a CPA or tax attorney will help you stay on the right side of the law.
Self-Employed Independent Contractor Income Tax Relief Tip #10: Take your retirement contribution to the max. Self-employed independent contractors have the best income tax relief vehicle the federal government has ever offered. While individual worker contributions to a simple IRA max out at $11,500, if you're under 50 in 2010 ($14,000 if you're over 50), how is this for serious income tax relief, as a self-employed independent contractor you can use SEP-IRAs to contribute 25% of your wages (or up to 20% of your Schedule C income) up to a maximum of $49,000. The income tax relief to a self-employed independent contractor are massive. A tax lawyer or CPA an give you the tax help to set up the right retirement vehicle for you.