Career

4 Tax Season Tips For Consultants

melissathompson / 8 Mar, 17 /

4 Tax Season Tips For Consultants

If you work as a consultant, regardless of the field, you most likely file self-employment taxes, meaning that you pay your taxes quarterly and then file a final, complete tax return annually like everyone else.

Unfortunately, those who are self-employed are responsible for paying all of the taxes typically split between the employee and employer – therefore, your taxes can take quite a chunk out of your yearly income.

Savvy consultants can reduce their annual tax burden by making smart deductions and keeping clear records in case of an audit. Just be sure to heed these tips and you’ll stay clear of excess IRS scrutiny.

File Right

For those new to the world of self-employment and consulting, let’s start at the beginning. You should receive a 1099-MISC form from companies you’ve consulted for, reporting your income, and you’ll file these with a Schedule C tax return with a Schedule SE to calculate your social security information. If you made under $5,000 you can also use the simplified Schedule C-EZ form – but there’s a catch.

 

Deduct Smarter

Deductions are the best way to reduce the amount you pay in taxes, but if you file the Schedule C-EZ, you can’t take deductions. Deductions need to be carefully itemized on the full Schedule C.

Now, the great thing about being a consultant is that you can deduct a wide range of items that otherwise would be covered by an employer. This includes home office space, supplies, and even a portion of your internet connection. You can even deduct relevant magazine subscriptions and work-related travel.

Be careful deducting items like computers and printers, unless you use them exclusively for work. If you have shared devices, you’ll need to calculate what percentage of their use is for your consulting job and what percentage is for other purposes. You can’t deduct more than that percentage of the costs. You also can’t make deductions above the level of your total consulting income.

Stay Organized

No matter what you plan to deduct, make sure that you keep careful, thorough records over the course of the year and consult with your accountant about how long you should keep everything on file. Also, be sure to organize as you go – if you just shove all of those receipts in a box or leave them on your computer, you’ll never get everything in order when tax time rolls around.

Be Aware Of Alarms

When filing your consulting taxes, you can find yourself under heavy IRS scrutiny in a few cases. For example, if you make a lot of money, you’re more likely to be audited.

Generally, this threshold starts around $200,000 and the average business consultant doesn’t make that much. Audits skyrocket among the elite, like consultants making over $2 million a year. Those making over $1 million a year are audited at a rate of about 6.21% while those making $10 million a year are audited 16.22% of the time. The IRS has their hands full with these industry leaders.

You’re also more likely to be audited if you make any kind of home-office deduction, even though these are quite common and valid. This is because your home office has to be used exclusively for work. Just because you work in a room part of the time and use it as your living room the rest of the time, doesn’t mean you can deduct that space as a work expense.

Finally, you can trigger an audit simply by making too many business deductions, or particular kinds. The IRS has become stricter about meal and entertainment deductions for businesses over the past few years, for example, so you may want to think twice about whether or not that meal is absolutely necessary. The IRS may not think so.

Depending on the type of consulting business you run, you can cut down on your tax expenses significantly by making smart deductions, but remember that there’s a waiting element in this. For greatest success, try taking deductions close to the end of the year so that you have a clear sense of how much of a profit you’ve made, how much you owe, and so you don’t have to wait as long to file your deduction claim.

It’s all about balancing things out in the big picture.

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