For many individuals, working as an independent contractor and receiving a 1099 rather than a W-2 can provide numerous opportunities. Aside from potentially supplementing one’s regular income, working as an independent contractor can provide the freedom to control one’s own work day and how the work is accomplished. Some people choose to work contracting assignments 100% digitally and live a lifestyle that allows them to travel freely and work from any corner of the globe as a “digital nomad.” However, regardless as to where the contractor choose to live or work – whether in the United States or abroad as an expatriate – a worldwide obligation to file taxes exists.
However, individuals who perform contracting work are often surprised and overwhelmed at some of the differences in handling taxes. If the 1099 contractor does not plan ahead and prepare accordingly, he or she may be in for a surprise on tax day when he or she owes significant sums to the IRS. Furthermore, the failure to satisfy certain tax obligations held by a contractor can lead to significant penalties and interest. Robert Hoffman of the Hoffman Law Offices can provide on-point guidance to help contractors manage their growing business and taxes. To schedule a free consultation call 800-897-3915 or contact the office online.
1. A Freelancer’s Failure to Make Quarterly Estimated Tax Payments
Unlike an employee receiving a W-2 who is only required to make tax payments by the April 15 tax filing deadline, an independent contractor who receives a 1099 is required to make filings and pay tax throughout the year. This obligation is often referred to as quarterly tax payments individuals and entities required to comply with quarterly payments are freelancers, self-employed individuals, contractors, and corporations expecting to owe taxes equaling or greater than $500.
Quarterly estimated tax payments are made four times a year, typically on the following dates:
- January 15
- April 15
- June 15
- September 15
If the date falls on a weekend or on a holiday, the quarterly tax payment deadline then falls on the next business day. While there are exceptions to the rule, contractors who fail to make quarterly payments can face a tax penalty.
2. The Self-Employed Individual Doesn’t Account For Additional Tax Burden and Fails to Set Money Aside
Individuals who are used to paying taxes as an employee with a regular income, may have become accustomed to a certain level of taxation. However, individuals who start work as an independent are often shocked at the amount they owe when the tax bill comes due. The main reason for this is while the freelancer may account for the standard income tax portion of their obligation, they may overlook the self-employment portion of the obligation. Freelancers and self-employed individuals are responsible for a self-employment tax of 12.4%. This covers both the employee and employer portions of the Social Security Tax. Individuals that fail to account for this part of their tax burden can often face additional penalties should they be unable to pay the full amount of tax due by the deadline.
3. The Contractor Doesn’t Form a Business Entity As Revenues Grow
Working as an independent contractor in a sole proprietorship may work for a time, but as the amount of work grows and the contractor needs to hire employees, it can become difficult to manage. Forming a business entity may not only save the contractor money on taxes, but also it can provide legal protection and insulation for the contractor’s personal finances. Structures such as an LLC, limited liability partnership (LLP), or corporation can provide a distinction between the company and the contractor. For many contractors the failure to establish some sort of limited liability structure can prove disastrous as the business – and its liabilities – grow.
Work With an Experienced Tax and Business Formation Attorney
Robert Hoffman is an experienced Los Angeles tax lawyer who frequently handles commercial and business formation concerns. He can assist a freelancer or independent contractor with a growing business meet all tax and quarterly filing obligations. Furthermore, he can help the freelancer set up a legal entity that will protect his or her personal property, assets, and all of the things the self-employed individual has worked so hard to obtain.
To schedule a free and confidential consultation, call 800-897-3915 or contact the Hoffman Law Offices online.