3 Tax Mistakes To Avoid If You Worked as a Contractor

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Do you feel like you’re fumbling your way through the tax side of being an independent contractor, trying not to make mistakes? Working for yourself should make you feel empowered and excited, not scared of messing up. 

That’s why GOBankingRates compiled a list of the three top tax mistakes to avoid so you’re confident when it comes time to file your tax returns.

Deducting Unreasonable Expenses

As an independent contractor, you can deduct expenses incurred to operate your business against the income you earn from it. Keep in mind, though, that these expenses must be ordinary and necessary:

• Ordinary: common and accepted in your industry
• Necessary: helpful and appropriate for your business

A common mistake many contractors tend to make is deducting expenses unrelated to their business, or outside what’s considered ordinary and necessary. For example, a business consultant deducts the cost of buying themselves new clothes or travel expenses for a personal vacation. Plenty of expenses fall within the IRS guidelines, so stick to those and don’t get too greedy. 

A helpful tip is to use a separate credit card for your business so you aren’t co-mingling personal and business expenditures.

Failing To Proactively Record Expenses

Another caveat regarding business expense deductions is that the IRS expects you to categorize and total your expenses for the year when you complete your tax return. 

The mistake many contractors typically make is waiting until it comes time to fill out their tax returns to compile all their expenses. Don’t do this! Instead, record your expenses as you pay for things. It will make your life much easier. The last thing you want to do is go through twelve months of credit card statements to figure out what you bought. 

Tax software can help you with this. If you are comfortable with spreadsheets, you can also use them to keep track of costs.

Not Making Estimated Tax Payments

Now that you’re an independent contractor and not an employee, no income tax withholdings come out of your paychecks. Instead, the Internal Revenue Service (IRS) expects you to pay them directly with estimated tax payments.

Estimated tax payments are due quarterly, typically on Apr. 15, Jun. 15, Sept. 15, and Jan. 15. To calculate how much you need to pay each quarter, you can estimate the tax owed on your current year’s earnings or make payments based on your prior year’s liability. 

Either way, if you fail to make the minimum estimated tax payments, the IRS and state taxing authorities may charge you penalties, and you will have a larger balance due when you file your tax return. Don’t throw money away with penalties. Make your estimated tax payments on time.

The Bottom Line

Working for yourself is exciting, so don’t let the tax side of it scare you. Keep these three tax mistakes in mind so you can avoid them in the future and make filing your taxes easier. 

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