By Valerie Rind
For whom do you work? The nature of employment and your relationship to an employer is complex. Most workers are employees, but a growing number are self-employed independent contractors.
In the eyes of the Internal Revenue Service and other taxation authorities, it is critical that you classify yourself correctly and follow the laws when you file tax returns. Get it wrong and you might owe interest and penalties in addition to the amount of unpaid taxes. Plus, you do not want to miss out on some of the legitimate tax benefits to which you are entitled as a business owner.
According to the IRS, you might be considered self-employed if any of the following apply:
-You carry on a trade or business as a sole proprietor or an independent contractor
-You are a member of a partnership that carries on a trade or business
Independent contractors generally receive a gross amount of pay based on the number of hours they work or a lump sum for a completed project. They do not receive benefits such as health insurance and paid holidays. Self-employed workers have the entire burden of keeping good records, and filing and paying their taxes.
Because the companies they perform services for do not employ them, no tax is withheld from an independent contractor’s paycheck. At the end of the year, the company might file a Form 1099-MISC instead of the Form W-2 rank-and-file employees receive.
Whether you are pulling together information to prepare your 2015 tax return or getting a head start on organizing your 2016 taxes, here are three mistakes to watch out for if you are an independent contractor.
NOT FILING INCOME TAX RETURNS
Not filing an income tax return, particularly when you owe taxes, is the most basic and damaging mistake any wage earner can make.