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What to know about contract work and taxes

Contract work can make your taxes quite complicated if you're not careful. Learn what to look out for here.

contrac workAccording to Fast Company, 38% of those under 35 are doing some form of contract work and 82% are optimistic about freelancing going forward. And why not? It’s a great way to have work-life balance and do more of what you love. And let’s face it, there are very few “stable jobs” in today’s economy. But, one of the downsides of contract work is dealing with your own finances, especially around tax time. So, here are a few tips to help you manage taxes more efficiently.

Track and deduct your mileage 

If you’re a standard salaried employee, you can’t deduct your commute to and from work.  However, if you work for yourself and work out of your home, you can deduct your mileage when you drive to see clients at a rate of 58.5 cents per mile (2022 rate).  

That may not sound like much, but let’s say you drive an average of 10 miles each way to see a client three times a week – that could end up being a few thousand dollars in deductions over the course of a year (and a big savings in your pocket). There are several apps such as MileIQ to help keep track of your business driving so there’s really no reason to not help yourself out.

Open a separate bank account and credit card

Keep your personal finances and business finances separate. The best way to do this is to have a completely separate bank account and credit card for your business finances and then transfer money to your personal accounts as needed. This will help you track your business expenses and better understand the profit and loss for your work. When tax time comes around and you’re trying to figure out how much you spent on your business, this will pay dividends.  Many banks let you link separate accounts making it easy to view all your accounts online or in their apps as well as transfer money back and forth between them. 

Pay Taxes Quarterly 

Self-employed contractors are responsible for paying taxes quarterly, otherwise, you can be subject to fines and late fees. Make estimated payments each quarter using IRS form 1040-ES  This will also help avoid a major (and potentially ugly) surprise come April 15.

Keep your receipts

This may seem painful and not worth it, but those business lunches, parking receipts, and trips to Stapes for supplies can add up over the course of the year. And if you have the receipts from your business expenses, it will be easier to declare deductions and document them should the IRS come calling. There are apps that make it easy to store your digital receipts and photograph and archive the paper versions. Check out QuickBooks Self Employed by Intuit which helps with receipt management and other tax-related items.

Consider an accountant

If you plan on contract work as your primary source of income or think you will do that for a longer period of time, it may make sense to hire an accountant to help educate you on the right tools and best practices to use. Many accountants also prepare and file your tax paperwork for you, but if nothing else they can help you get started on the right foot and will likely identify expenses that you can write off that you may not have discovered on your own.

Working for yourself can be a great life choice but make sure you plan accordingly so that tax time doesn’t come with any unpleasant surprises.