What Does Being A Consultant Mean For Your Taxes?
There are many benefits to being a consultant. You get to be your own boss in many of the ways that matter most. You get to decide when the workday starts and ends. You get to decide where it happens too. This can be a huge boon to stay at home parents, the disabled, or those who live in remote areas. But those upsides come with drawbacks and one of those drawbacks is tax season. No one likes tax season, of course, but it can be extra stressful when you're a consultant or freelancer, because the only person helping you do your taxes is you. Being on your own like that can be scary, especially if this is your first year doing taxes outside of a full time job.
Being a consultant or entrepreneur means that you will have to file your own forms. Instead of your employer getting those forms in order and then simply handing them over to you to fill out, you will likely have to figure out which forms to file and how to do that on your own. Luckily, a lot of this information is readily available online. In fact, you may be able to file many forms like the 1099 online to save yourself time and trouble, as well as saving a few trees.
Now we get to the matter of actually paying those taxes. If you look at a paycheck from a traditional employer, you will see that they take out portions of your gross pay for a variety of reasons. Some go to your healthcare plan, or your retirement fund — and some of that goes to paying Social Security. When you're your own employer you have to plan for that expense yourself. Either set a portion of your paycheck into savings each month or brace yourself for a big bill coming due on tax day, because one way or another you will have to pay it.
Since you are your own employer you will also find yourself taking on the bulk of your own business expenses. Everything from gas miles to printer paper and ink, and these small costs can accumulate significantly over time. The good news is that many of those expenses will be deductible come tax season. Keep your receipts and be ready to hunt down every deduction you can find. Every little bit helps after all.
The long and the short of it is that you need to plan ahead for tax season. That may involve setting aside money for social security and might involve hoarding receipts and keeping track of anything that might be considered a business expense. There are apps that can help you track those expenses and plan for tax season well in advance of the deadline. The last thing you want is a nasty surprise come tax day.
Consider Hiring professionals
If your situation is particularly complex or involves a lot of money, you might want to consider hitting a professional to help you with your taxes. Think of it this way: how much time are you spending doing your taxes? Would you be able to afford to pay yourself at your own hourly rates for that same amount of time? At a certain point, it becomes more cost effective — and certainly less stressful — to hire someone who really knows what they're doing.
Whatever you end up doing, you don't want tax season to catch you off guard. If you're aware of it in advance, you can plan for pretty much everything. You know you're going to have to pay, it's just a question of how much. You have some control over that, through finding your own deductions and making sure that you don't accrue late fees. This is the cost of being your own boss. If you stay on top of things now, it will be well worth it in April.