Are you an independent contractor managing your business expenses? Are you looking for the best way to track your expenses? Are you looking to optimize your tax return while working on a 1099-MISC basis?
As an independent contractor, you know you have to wear many hats while running your business. Not only do you have to search and land contracts, and work on contract, you also have to manage your expenses, insurance, and retirement payouts, taxes, licensing, and project prioritization. Managing your own business can feel like a full-time job before even working on your projects.
When managing your business expenses as an independent contractor, it can be hard to know where to start, but creating and following a simplified process can help alleviate the stresses of managing money.
Business Structure Sets the Stage
What is the best business structure for you? There are four main options you can choose from:
1. Sole Proprietor
You will be taxed the same on personal and business expenses. There is less paperwork, however, you have no corporate protection on your assets.
You are not viewed as a distinctly separate entity and will be taxed as such. There is less paperwork and there are some legal protections for debts and court judgments.
Your business is not taxed itself, only the shareholders. There is more paperwork than the past two options and provides legal protection from debts and court judgments.
Your businesscorporation is viewed as an individual taxpayer by the IRS. There is a good amount of paperwork and offers legal protection from debts and court judgments.
The structure you choose should depend on factors such as the size of your business, your growth trajectory, and plans, as well as your annual profits. Also, the structure you choose will determine your compliance, tax, and legal obligations.
Pay Yourself No Matter What
By sending yourself regularly scheduled payments, you can then truly see the health of your company. By not allocating funds to your salary, you are setting you and your business at a disadvantage by not being sure if you can truly raise prices, afford marketing efforts, or even cut costs. You should pay yourself a reasonable compensation, says the IRS, but there is no definitive amount or percentage.
Make Sure to Stick to Your Budget
Creating a budget can help you determine how you operate your business, overall costs, and how/when you will meet your future goals. Start with a baseline budget and reassess it annually. Your budget should align with your business plan and market forecasts.
It doesn't hurt to perform a monthly budget review, in addition to your weekly financial tracking time. During these reviews, write down estimates and projections for the upcoming months, while taking your actual gross income and comparing it to your projections. This can help you get an idea of you can save money, expand your business, and continue to pay yourself a comfortable wage.
Always Track Your Financial Data
You want to track everything. Every penny in, and every penny out. You want to track what was purchased, at what cost, for which reason, where it was purchased, and when it was purchased. Keeping a ledger of these details will help you expedite not only your monthly budget review and weekly financial tracking, but will assist with filing your taxes. Also, keep track of your lines of credit over time. Grow your line of credit so you can grow your business.
Take Advantage of Self-Employment Tax Deductions
There are may write-offs and deductions you can claim as an independent contractor. They are always "written in the fine print," so make sure you review all of your options thoroughly.
The rule of thumb: SAVE ALL OF YOUR RECEIPTS because you may buy more business-related products/services than you realize.
Some of the best tax write-offs include:
- Individual 401K (retirement savings/).
- Savings Incentive Match Plan for Employees (SIMPLE/) IRA (retirement savings/).
- Simplified Employee Pension (SEP/) IRA (retirement savings/).
- Phone (landline and cellular/), internet, and fax expenses.
- Job-related education, certification courses, online courses, seminars, subscriptions, tuition, and books.
- Health, dental, vision, and long-term care insurance, which can also be extended to cover your spouse and dependents.
Note: If you enroll in your spouse's insurance plan, you cannot take this deduction.
- Legal and business preparation fees.
- Business marketing and advertisements (business cards, stationery, ads, marketing collateral, business promotion, etc./).
- Transportation, such as the car you use for business travel, any flights have taken or vehicles rented for work purposes, and trains, taxis, and public transportation associated with the business.
- Meals taken with business associates or potential clientele.
- Commissions and fees paid to non-employees.
Note: If the size of the commission exceeds $600, you need to file a 1099-MISC form and submit it to the IRS.
- Home office expenses.
- Interest payments made on a business-owned property.
- Rent or lease payments on a business-office/warehouselocation, including utilities.
- Repairs and maintenance to any work-related device/equipment.
Before you can write all of these items off, you will need a detailed record of business activity, expenses, income, and receipts. You will always want to have this because if the IRS decides to audit you, you are prepared and can prove all of your tax deductions.
Remember: Set aside 30% to 35% of your gross income for taxes, which will include income tax, self-employment tax, social security tax, and Medicare tax.
Continue to Work on Reducing Your Debt
Debt can not only drain you but your business. Prioritize reducing your debt - whether it's paying off a business loan or your business credit cards.
Eliminate everything that isn't a necessity for your business. Do you need expensive paper and pens if you mainly work on a laptop? Do you need to keep that membership or subscription? What is essential?
Commit to paying specific amounts on each debt monthly. If you can, talk to creditors and work to reduce your settlement amounts, extend your loan term to lower your monthly expenses, or even establish a different payment plan.
Looking to Invest in Managing Your Business?
If you find yourself needing to find funding for your business, First Union Lending is here to help.
We have nine different business loan types to choose from. This means that we're uniquely qualified to help you find the perfect loan to open your small business.
Applying for a business loan doesn't affect your credit. Better yet, your business loan may be approved as soon as the same day.
To discuss our business loans with one of our lending experts, click here or call 863-825-5626. We'll talk about our various business loans and help you find the right one for your medical practice.
Get started with the process now by learning more about our business loan types.