Many Americans have been forced to adapt to a change in their work status, and many of them now need to rethink their tax status. The statistics show that about 25,000 truckers left the business last year, but another 30,000 took their place. Come April 15, the IRS expects these new trucking companies will file their taxes mostly as sole proprietors amid the swelling ranks of independent contractors nationwide. But filing taxes as an independent contractor is a lot more involved than as a traditional, full-time employee.
One big change that is coming soon is that any “payment” made for services or goods over $600 (after December 31, 2011) to a for-profit entity including individuals, LLCs, partnerships and corporations, are required to be reported to the IRS and a 1099 must be issued to the payee. This is a big change over current requirements, which exclude payments to corporations and payments for goods. As an example, if your business purchases a new computer from Best Buy in 2012 for $600 or more, you will now be required to issue a 1099 to Best Buy at the end of the year and report the transaction to the IRS.
Here are some tips for tackling taxes as an independent contractor. If you are an independent trucker, you need to tap into an industry association (like the NTA) and find an accountant with experience in your profession. Next, get into the habit of setting aside 40% of your net income. “A good rule of thumb is that whenever you earn a dollar, you should put 60% in checking and 40% in savings,” says Paul Payne, one of NTA’s endorsed CPAs. He went on to say, “Set up a business tax account and deposit that 40% into it, then use that money to pay taxes and business expenses.” You should also keep meticulous proof of all your payments. Make sure that your receipt or credit card statement itemizes purchases and reflects its business purpose, be it office supplies or transportation expenses.
Another valuable tip for independents is to pay estimated taxes to prevent any additional interest charges. If your business is profitable, you will likely have to pay estimated taxes throughout the year, usually on a quarterly basis. Also, don’t cheat yourself – anything that is business-related is tax deductible. Deductions can be taken on everything from home office and utilities, phone and internet charges, office supplies and transportation expenses, be it carfare or mileage. Once again, it is crucial to provide proof of payment and an explanation of the business nature of the expense. If you are deducting travel expenses, be sure to have proof of where you went and why.
Home office deductions, which are often the largest deduction, are determined by deducting the square footage of your home office area from the total square footage of your home to calculate what percentage of your mortgage, rent and/or maintenance is deductible. You may even be able to deduct a portion of your utilities. On top of all that, “Client meals and entertainment costs are generally 50% deductible,” says Payne.
Taking advantage of the latest health insurance filing change can also be helpful. Effective this year, health insurance is now 100% deductible against your income to the extent that your business is profitable. That’s a change from previous years, when it was a standalone deduction unrelated to your income. “The Benefit of this change is that it lowers your self-employment tax, also known as social security tax,” says John Murrill, another NTA endorsed CPA.
If you have a high-deductible health plan, a sensible choice for independents who rarely tap into their medical coverage (because the monthly premiums are lower) might be a Health Savings Account (HSA). With a HSA, you contribute money that goes towards paying medical expenses. The contributions you make to your HSA are tax deductible (up to certain allowable limits), which lowers your taxable income. In order to qualify for an HSA, your health plan must have a deductible of at least $1,200 for an individual or $2,350 for a family.
Another good way to lower your taxes is to open an Individual Retirement Account (IRA) or a Simplified Employee Pension (SEP) plan to secure retirement savings. These retirement-savings plans are usually for people who don’t have a 401(k) plan available to them. An IRA allows you to save (and write off) up to $5,000 a year toward your retirement. If you think you want to sock away more than $5,000 a year towards your retirement, set up a SEP plan, which allows you to contribute approximately 20% of your income. One stipulation is that your business must be profitable in order to contribute any money to a SEP plan.
If your annual income exceeds $50,000 you may want to consider incorporating. If you’re an independent contractor, especially in the trucking industry, this is a no-brainer. If for no other reason than this, you should incorporate your business to protect what you have worked so hard to build. “Organize your business as a corporation or LLC, put yourself on the payroll, and make an S-Corp. tax election, which could save you $3,000 to $4,000 for every $50.000 in profits,” says Murrill. If you’re operating as a business such as a corporation or LLC, you must set up a separate bank account. “Keep your personal and business expenses separate for tax liability reasons,” says Murrill. Finally, set up a bank account that’s totally separate from your personal account.
Both of NTA’s in-house CPAs agree: the trick to saving on your taxes is not to wait until the last minute. Call and schedule an appointment with your accountant or tax preparer as soon possible. Get your taxes done now and then start planning ahead for next year so you can keep more of those hard-earned dollars in your pocket. If you don’t already have an accountant or if you have questions, contact the professionals at NTA at (800) 805-0040 or visit www.ntassoc.com. Until next month, “Drive Safe – Drive Smart!”
~ NTA is a name and organization you can trust. Not only is our website (www.ntassoc.com) an official US DOT Internet Training Site, but we are also the administrators of a Nationally Accredited Drug and Alcohol Program. If you have any questions, call me at (562) 279-0557 or send me an e-mail at firstname.lastname@example.org. Until next month, “Drive Safe – Drive Smart!”