The idea of being your own boss, making your own hours, and taking home money for your own work is tempting to many. America has a lot of room for the entrepreneurial spirit, and there are even some hybrid opportunities where you work for other businesses while not being tied to their hours or office politics. It's not as easy as taking all of the money and handing in a W-2, so consider these financial situations to be ready--or at least not blindsided--by tax surprises:
Withholding Will Be A Thing Of The Past
Tax withholding is a bit of an annoyance for most modern workers. Some people are constantly infuriated at seeing the deductions on their paychecks with no say in the matter and would love the opportunity to have all of the money up front.
The problem is that standard workers receiving W-2 forms don't realize the truth about these taxes: unless you're making unreported income (getting paid under the table), you'll never have a say in the matter. As you transition to becoming a contractor--under a larger company or independent--realize that you're not escaping taxes at all. You're just getting more control, sometimes with more risk.
You still have to pay taxes to avoid being audited and possibly fined. In most cases, contractors receive a 1099 form that reports income from different sources, and it's up to you to input these values properly. It's not just about punching in the numbers; without the right deductions, you'll lose a lot of your money to the tax system because you lack the pre-established tax breaks and exceptions that large businesses enjoy by employing tax officers.
Deductions Become More Important
As a W-2 recipient, deductions are about squeezing out a bit more money from your tax return and getting a great refund. As a contractor, it can mean the difference between having to repay thousands of dollars or getting a great refund.
This is the most impacting difference between working as a waged/salaried full-time employee and a contractor. Under the W-2 reporting, you can theoretically enter your info without thinking much about deductions and not be in debt for thousands of dollars. As a contractor, you are hybrid business and individual taxpayer with rates that assume you'll be making some deductions, and if you don't think you deserve those deductions, the IRS is happy to take the full rate.
There are multiple deductions to consider. Equipment purchased for your business can be deducted, and the type of equipment matters. Computers, cars, and machinery used to get your job done all have their own specific rates and can depreciate over time.
Depreciation is its own category of tax knowledge that requires study, and it can be modified by repairs. Repairs, replacements, and other modifications can be tax write-offs as well, and it can be a full-time job figuring out how to make it all work together.
Instead of risking a big tax debt or accidentally taking a deduction you don't deserve--which may result in an audit--contact a tax professional for a tax advisory that examines every part of your work situation to find the right mix of savings.