How to protect yourself from tax fines and legal issues while working as an independent contractor
Working for yourself or as an independent contractor has plenty of perks: flexibility, the freedom to choose your projects, vacation time when you want it, working from home and more. One trade-off for independent contractors, though, is the loss of institutional frameworks: things like 401(k) plans, health insurance, legal assistance and taxes either disappear or become more complicated. Here are a few things independent contractors should keep in mind to make sure they’re legally protected, whether working from bed or their favorite coffee shop.
There are obvious challenges to navigating taxes as an independent contractor, including filing your own paperwork, assembling a retirement plan without a 401(k), and learning what you can legally deduct. Many independent contractors are part of the “gig economy” and should file a 1040-ES, meaning they’ll pay quarterly estimated taxes. Other independent contractors fill out a W-9 form and then file a 1099-MISC. No matter what category an independent contractor falls under, they are liable for Social Security and Medicare taxes, just like employees of any other company. Independent contractors can deduct home office space, parts of phone bills, some food, travel expenses and other work-related expenses. However, knowing exactly what can be deducted, and how much, can be a fine line. Working with an accountant who specializes in independent contractors is recommended.
There are several different types of business structures independent contractors can create. Sole-proprietorship is the most simple: it’s a business owned and operated by one person. An LLC is another popular choice among independent businesses for the legal protections it offers. An LLC separates your business assets from your personal assets, but is taxed similarly to a sole proprietorship. Anselmo Lindberg & Associates attorneys can help independent contractors choose which type of business is right for them, and get them set up with an LLC or other structure to make sure they’re legally protecting their personal wealth.
Without a retirement plan from their company, independent contractors will have to come up with a savings plan of their own. It’s important to build a savings cushion in case of emergency, to anticipate upcoming bills and business expenses, to structure savings so you are able to pay estimated taxes and to make an estate plan. Most people benefit from a “set it and forget it” savings structure similar to automatic 401k payroll deductions. Whether your retirement savings plan takes the form of an IRA, an index fund or some other savings vehicle, try to set up automatic contributions to ensure you’re saving aggressively for your future.
Independent contractors often work on contract with different companies or for individuals. Sometimes, they have to contract work out themselves. When working with contracts, it’s important to make sure they’re structured in a way that lays out payment terms clearly and protects you from liability. Having an experienced attorney on hand to review contracts can help protect you and ensure you’re compensated on time for your work.
There are many freedoms that come with working for yourself, but in other ways being an independent contractor carries additional hassles. Simplify the process and guarantee your legal protections by working with an attorney experienced in assisting independent contractors with taxes, estate plans, business structure and contracts. Contact Anselmo Lindberg & Associates to get your business on track today.