Contract Work and Taxes

I hated doing contract work because I hated dealing with the taxes. However, if you have a good accountant, they can save you a LOT of money with deductions. I have a good one, and I hardly ever had to owe at the end of the year, even when I only had 1099s.

So my advice? Keep receipts for everything, document everything, and hire an accountant as soon as you can afford to do so. The accountant will tell you what else you need to do, and how much you should put away (good amt. for now will be about 15%).

CONGRATULATIONS!!! I know how you feel/felt!! My husband was unemployed for 10 months!!! Our savings is gone!!!

You can call the IRS and they will walk you through it.

he will get a 1099 at the end of the job/year.

He can chose to file his taxes with each paycheck he gets or he can file quarterly. I choose to file after each paycheck on my 1099 status. Then I don't get stuck with a huge bill.

don't forget to cover Social Security as well in taxes....call the IRS - they will NOT lead you astray...I know it can be daunting...but they have helped me several times...and I have NEVER had a rude person with the IRS yet!

CONGRATULATIONS!!!

I second Nikki G. on getting a good accountant. If you can't afford one, go to the IRS website and check out these forms. Schedule C, Schedule SE.

Quick books or Quicken are great programs to help you to electronically keep things in order.

Keep receipts and make copies of them as well because certain kinds of thermo receipts fade over time. Every dime earned at this job goes into quick books and every dime spent getting the job done goes into Quick books. The schedul C form will give you ideas as to what kinds of things are deductible according to IRS standards.

This will also give you a good framework on what to expect from your accountant.

You should also consider sending the IRS quarterly tax payments. They have informatiion about that on their website too.

Congrats on the new job.

You should talk to an accountant about how to get started. I pay about 40% quarterly.

http://www.irs.gov/Businesses/Small-Businesses-&-Self...

Here's a great place to start
http://www.irs.gov/Businesses/Small-Businesses-&-Self...

Do you currently have a tax professional/accountant? I would consult them. If you go to H&R Block or a similar service, be careful. Many of their "professionals" are not qualified to handle the more advanced tax senerios.

I've never been self employed, but a few things I do know...
1. It's recommended that you put away 25% for taxes
2. You should consider making quarterly tax deposits. In some cases you may be required to do so.
3. You will have the option of using either actual travel costs (gas, portion of vehicle repairs and insurance) or milage (the number of miles you travel times the IRS rate, I beleive around $.50 per mile) Often milage is the easier way. Either way be sure to keep receipts and a milage log. For a milage log, just keep a small notebook in the car and write down the milage each day.
4. Keep receipts. Keep them organized. A good way is to set up a simple excel spreadsheet.

Good luck.

I do some contract work and what my tax preparer has told me is that you need to pay $100 per every $1,000 earned for social security.

The 30% should be good for the taxes. He has to pay taxes on what he's earned in a quarter, whether he's actually been paid or not. He is supposed to pay the taxes in advance so you really have to kind of try to determine what you think he will make and pay the 30% on that. I never did that; I just paid what I could when I could but because I also had a regular job where taxes were withheld and so did hubby, I came out okay even with a small penalty for not pre-paying the taxes.

Talk to an accountant but generally keeping track of miles is better than gas receipts. You can take meals but it depends upon how far from home you are. He will also need office or other work supplies. Employer is not expected to supply those. He is also supposed to have a key to come and go as he pleases, they can not tell him he has to work 8-5 -- if he wants to work 7-3 or 9-6 he can as long as his work is done. They do not have to supply coffee for sub-contract employees.

That's how it worked years ago when I worked 1099 wages but some rules have changed. Basically his is a small business owner with one employee (himself). Also talk to an accountant about spousal or child exemptions for Social Security. At one time a small business owner could pay his/her kids to sweep up the work space or wash work vehicals and their pay was SS exempt -- same for spouses. But this may have changed.

How it used to work is if he earned $50,000 in 1099 wages but paid you for taking care of the books and the kids to keep his car clean and paid $20,000 (wages to you and kids) then deducted for supplies, milage, meals, phone, ect and ended up with a net earning of $10,000 that is what he paid taxes and SS on -- not the $50,000 he actually earned. Some accountants will tell you to set aside office space in your home and deduct a % of the mortgage and utilites as business expenses but because IRS rules have gotten really strict some accountants will tell you that it could be a red flag for an audit. But it doesn't hurt to ask.

I do home daycare and our tax laws are a bit different since we do it all in our house and we feed other kids and stuff like that, but I can give you some pointers.

First the first year you won't really be able to pay quarterly, the penalty for not doing so will not be anything this year because he is basically starting at the start of the last quarter of the year. So, after you file those taxes you will have a better idea of what his business tax amount will be and can either file quarterly if indicated (Turbo Tax tells you how much and how to do it and everything if you have to do this).

Save every receipt, and get a receipt, for everything for this coming up quarter. Have him write down mileage, or keep a log of where he went at least so you can googlemap the distances later, each time he has to use his car for anything work related (even picking up office supplies for use at home would count). It sometimes helps if that car becomes the car for him to use for business only, but if that is not possible it may also be possible to just add up all the OTHER stuff he does in the car (library every Wednesday night is 3 miles, driving daughter to school is one mile, etc.).

Anything he buys have him put a receipt in a basket when he comes home. Hang one in a very obviously unavoidable place. Tell him he can't make a purchase at all, even McD's, without getting a receipt from now on. When it comes January 1st take all those receipts and put them in an envelope and have him start a new pile. I would personally do his portion of the taxes as soon as you can. Either find a tax person who has experience with independent contractors (and ask them for references) or do it on Turbo Tax. Turbo Tax walks you through it every step of the way and is totally user friendly for this, just make sure you get the home business program.

It is wise to put away 30% this quarter. If you do your taxes soon in the next year you will have a better idea of what number you really will need.

I would say that the biggest thing he needs to consider is opening a single checking account for contract work only. This account would be used to purchase any item he needed to buy to do his job and to fund any purchases at all. This way it is cut and dry when it's time to do taxes.

Then he needs to pay himself his salary out of that money, not write checks for groceries or anything. I do know this way works well for some. Others are more able to keep track of everything but it is often harder on the accountant when it comes time to start going through a shoe/boot box of a years worth of receipts.

So I suggest he do a business account. He can name it whatever he wants of course but it will say in the name area "Joe Jones DBA (doing business as) Joe's gardening services".

This way all the business money is separate from the household money.

Oh the things you can deduct !
Learn what he can deduct - mileage, obviously, but if he is doing paperwork, etc. from home, then a percentage, based on sq ft of office space, of the home's expenses, percentage of cellular phone if not 100% dedicated to business, if he has to entertain clients - then meals, etc. also.

I do some consulting work on the side of my full time job, so I keep a running spreadsheet of time spent, mileage used, phone calls, etc. Most of this is logged on my billing time sheets for my client(s) so it is easy to "prove" to the tax man.

Since your spouse is full time contract, you should look into filing quarterly taxes. It is easier in the long run and avoids an outrageous tax bill at year end.

Do spend time on the IRS site. Also, maybe find a CPA that your spouse can barter with - trade consulting time so no cash outlay for the advice. Tho' I believe he could probably deduct fees paid to a CPA :)