According to early 2015 data, independent contractors potentially account for up to 10 percent of the workforce in the United States. In addition, independent contractors feel more gratified with their current work arrangements than standard full-time workers. However, it isn't uncommon to lose that feeling of satisfaction at income tax time, as independent contractors tend to make mistakes when it comes to their taxes. To help maintain the appreciation of your self-employment, here are three of the common mistakes that independent contractors make:
1. Assuming That More Income Means More Taxes to Be Paid.
Most people tend to think that if they make more money that they'll have to pay more taxes to the government. Contractors tend to place a cap on their annual income so that they can avoid extra taxes. However, this isn't necessarily the way income taxes work. When you move up into a higher tax bracket, you will only pay the higher tax rate on the amount of income that is in that higher bracket. The income that was earned in the lower tax bracket will not be affected.
2. Allowing the Fear of an Audit to Keep From Claiming Expenses
Thinking of an audit occurring to you is frightening. No one wants to go through an audit, thanks to the horror stories. As long as you only claim legitimate expenses and have the evidence to back them up, you will be fine. This is true even if your itemized deductions trigger an IRS red flag and you get audited. Even if an error is discovered by the auditor, as long as you didn't make the mistake intentionally, you'll simply pay the fine and move on with your business.
3. Failing to Report All of the Annual Income
While it is true that you will probably not receive a 1099-MISC for income that you earned that equaled less than $600, you are still responsible for the money that you earned. You still must report it to the IRS and pay taxes on it. By law, all income is mandatory for reporting to the government whether you receive a 1099 form or not.