Running a business as an independent contractor means constantly looking for ways to cut unnecessary expenses, and sometimes that involves doing work that would be more convenient when outsourced.
Taking on extra work makes sense at times, but some professional services provide more than just convenience. For example, tax laws are complex and always in flux. If you prepare your own tax returns, there’s a chance you’ll miss something important or make a mistake that could result in penalties or trigger an audit.
Before you dive into preparing your own tax returns, consider the following benefits of hiring a pro.
Independent Contractor Taxes Can Get Complicated
Whether you’re starting a side business or you’ve been freelancing for a while, taxes can get complicated fast. Your tax obligations depend on a variety of factors that aren’t always obvious. For instance, how you earn income, your business structure, whether you have employees, and where you operate are just a handful of factors that determine what you owe the IRS.
Business Structure
If you want to form a business structure for your contractor business, a tax pro can explain the benefits of each option. Each business structure has different filing requirements and tax obligations. How you file your taxes as a business will be different than when you file as a contractor. If you offer services subject to sales tax, you’ll be required to form an entity in order to get a permit to collect sales tax.
Self-Employment Income
If you’re an independent contractor or running a gig-based business, you need to pay what would normally be an employer’s portion of payroll taxes. This amount increases your tax liability and is part of your quarterly tax payments. Each year you’ll need to prepare a personal tax return and a return for your business. If you don’t have an official business structure yet, doing your own taxes can be confusing.
Subcontractors
If you pay subcontractors, you need to follow specific rules like collecting a W-9 before paying them and filing Form 1099-NEC if you pay them more than $600 throughout the year. A tax pro can help you stay on track.
Location
If you operate in more than one state or even internationally, you’ll likely have additional filing requirements. In this situation, professional tax guidance is invaluable.
With so many rules and regulations to follow, it just makes sense to hire a professional to do your taxes every year.
A Pro Will Help You Make Legitimate Deductions
Many people claim deductions based on what non-professionals have told them they can claim. There are a lot of myths about valid tax deductions, and if you’re not careful, they can trigger an audit. For example, you can deduct business use of your vehicle, but you need to keep records that track mileage and valid business purpose. Another common misconception is that working from home automatically guarantees the home office deduction, but that’s not always true. Not every workspace qualifies. A professional tax preparer can evaluate your situation and tell you if your workspace qualifies for the home office deduction.
Mistakes Can Get Expensive
If you’re considering doing your own taxes to save money, consider that errors can cost more than the price of a professional tax service. For example, if you file your return late, pay late, misreport your income (even accidentally), or claim invalid deductions, you can end up with serious penalties and interest. The failure-to-file penalty can be up to 5% of your unpaid tax bill for every month your return is late.
When you hire a professional tax preparer to handle filing your returns, you’re paying for knowledge and experience that will help you avoid the penalties that come from missed deadlines and incorrect paperwork.
A Tax Pro Can Answer Your Questions
When you’re trying to file your own taxes, you won’t have access to a professional to answer your questions, which means you’ll be stuck turning to the internet. Googling tax information is a fast way to get the wrong information and could lead to costly mistakes. For instance, if you get a letter from the IRS that you don’t fully understand, a tax pro can tell you exactly what they want. If you try to guess or ask other people online what they think, you’re bound to get some bad interpretations.
Professional Tax Preparation Should Be Part Of Your Business Strategy
Handing your tax prep over to a pro does more than just take a task off your plate – it gives you access to a qualified, experienced professional who can ensure your taxes are filed properly with legitimate deductions by the deadline.
Make professional tax preparation part of your business strategy so it doesn’t get the axe next time you need to cut costs.
Photo by Cht Gsml: Unsplash
