Whether you’re an independent contractor, freelancer, or on-demand worker, the tax implications are the same. You don’t have to work with a payroll company to deduct your taxes. You can do it yourself. Plus, doing so may save you money because you’ll opt-out of non-federal withholding for FICA and Medicare.
However, some people argue that independent contractors should still be required to create their own pay records despite not being considered employees by law. Here are some reasons why you might want to create your own pay records if you are an independent contractor.
Why you Might need to create your own Pay Records
The complexity of your business. A contractor has the flexibility to subcontract out work or work from home, and that can alter his or her tax liabilities. But creating pay records at a job site or coworking space is often difficult. If you’re an independent contractor and want to create pay records for yourself or people you subcontract to, you can use an online paystub generator with a customizable template.
If you’re the contractor, you can negotiate with your customers to create a third-party payroll provider for you.
How to Create a Proof of Income and Business Paper Trail
The quickest way to document your income is to keep receipts. Of course, your accountant or tax preparer will help you create a detailed record. There are a few options for creating your own pay records.
For self-employment tax statements, use Form 1040-ES for freelancers, Schedule C for sole proprietors, and Schedule C-EZ for partnerships. These forms contain a couple of options. First, you can use the Schedule C-EZ if you’re self-employed. It’s more complex, so it’s not always the best choice for freelancers. However, the IRS recommends it.
Second, you can use the 1040-ES for freelancers, where you can also get help from a good tax professional. If you don’t get your forms in on time (unfortunately), you can file extensions and wait until October 17th to file. Individual tax credit statements – The ITC tracks tax deductions for qualifying expenses.
Benefits of Creating your Own Pay Records
Reduced costs and paperwork. For example, you may be saving on your tax withholding and payroll by creating your own record. Also, in the long run, you’ll have a record that you can review in the event you later decide to make more than the 1099 amount or if you need more of your tax refund back for a health care expense or child care expenses.
For example, you may be saving on your tax withholding and payroll by creating your own record. Also, in the long run, you’ll have a record that you can review in the event you later decide to make more than the 1099 amount or if you need more of your tax refund back for a health care expense or child care expenses. Having your own record may give you quicker refunds, too.
Creating an LLC and Paying Yourself
Some say that if an independent contractor creates his own pay record, he’s no longer considered an independent contractor. That’s not true. But if one person pays himself, the IRS might say that individual is considered an employee.
This rings especially true if you incorporate yourself as an LLC. However, forming an LLC has numerous benefits to an independent contractor, which we’ll touch on below. You should be aware of the requirements for starting your own business though.
Advantages of an LLC
Although LLCs are often associated with sole proprietorships, that’s not always the case. For example, you can be an LLC with multiple workers, and it’s very common for accountants to set up partnerships. That’s because LLCs tend to have more favorable tax treatment than sole proprietorships.
That includes more favorable treatment in the area of income tax. In a sole proprietorship, the owner of the business files a personal tax return. However, if you are an LLC with multiple owners, you file an entity tax return.
The business owner files as an individual, but everyone else files as an entity. In many states, an LLC owner can file as an individual on their personal tax return and also as an LLC owner on their business tax return.
Find an Accountant who Understands Freelancing and Small Businesses
The first reason is your accountant knows how to deal with freelance, contract, or on-demand workers. They understand what you do and you know they understand your situation. Therefore, they will pay special attention to the taxes you owe.
This type of accountant will pay special attention to how you are billed so that you don’t unintentionally overpay. You can hire an accountant up to a national level or a specialized one in your area.
In addition, a person who specializes in taxes for freelancers is likely to know a lot about the requirements of state and federal laws. This will benefit you greatly when you’re looking at tax deductions to take for being self-employed (or an employee of your LLC).