Category Archives: taxes

According to the IRS, independent contractors are individuals hired to do work for someone else but are not considered employees. Let’s take a look at a few ways of reducing tax liabilities as independent contractors.

What Is The Difference Between Tax Evasion And Tax Avoidance?

It is very important to distinguish between tax avoidance and tax evasion. Tax evasion is the use of illegal practices in order to avoid paying taxes. These practices include overstating expenses, concealing assets, or underreporting income. Every taxpayer must know that tax evasion is unlawful and can result in either fines or imprisonment.

Tax avoidance, meanwhile, refers to the lawful use of strategies and provisions written within the tax code to minimize tax liability. This involves organizing your finances in ways that reduce your tax obligations while still following the tax laws.

How Independent Contractors Avoid Paying Taxes

Use these five tips below to minimize your tax deductions while working as an independent contractor.

Take Business Expense Deductions

As a self-employed worker, you have the opportunity to lower your tax liability by deducting various business-related costs. These expenses can include equipment costs, vehicle usage for business, and advertising/marketing expenses.

It’s crucial to keep track of all receipts to accurately report the deductions on your tax return. Typically, this will be done on your Schedule C or appropriate section based on your filing method. By taking advantage of the deduction possibilities, you can reduce your taxable income as a self-employed individual.

Write Off Self-Employment Tax

You may deduct your self-employment tax from your income tax. This deduction allows an individual to write off the employer’s portion of FICA taxes when filing the return.

The IRS actually has a provision that automatically includes said deduction in your Schedule SE. Even if you forget to include it, the IRS will notify you of the error and provide a refund accordingly.

Tax-Advantaged Investment Accounts

It goes without saying that contributing to a retirement account can help reduce your taxable income. Retirement accounts, such as IRAs and SEP IRAs, are typically tax-deductible.

This means that the amount of money you choose to contribute ultimately reduces your taxable income for the year. The money you contribute can grow tax-deferred until you withdraw them in retirement, potentially leading to larger growth over time.

Consider The Structure Of The Business

The structure of the business organization can have an impact on your tax burden. For instance, you may be able to lower your liability by choosing to organize the business as an S-Corp.

Opting for an S-Corp will allow you to pay yourself a salary and potentially avoid some self-employment taxes.

Use Self-Employment Health Insurance

As a self-employed worker, you can benefit from tax savings by using your self-employment health insurance. You do have the option to deduct the premiums you pay for medical, dental, and other qualifying long-term care insurance coverage for yourself, spouse, and dependents.

In order to claim this health insurance write-off, you can enter it on Part II of Schedule 1 as an adjustment to your income. The deduction is then transferred to page 1 of Form 1040. This allows you to enjoy the benefits, regardless of whether you wish to itemize your deductions.

How Do Independent Contractors Report Their Income?

Independent contractors have the flexibility to negotiate payment terms with their clients and/or employers. Depending on the type of agreement, payments can be made through various channels, including checks, ACH deposits, or wire transfers. These payments are not considered salary or wages for tax purposes since taxes are withheld.

During tax season, the payer must provide the contractor with a Form 1099-MISC, reporting the income paid in the previous year. If you are working with multiple clients, you can receive several copies of this form. Any earnings below $600 from a client throughout the year will not require a 1099-MISC form. However, you still must report that income on your Schedule C.

Tax Settlement in Mesa, Arizona

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Most CDs (certificate of deposit) do not allow regular additions to the balance following the initial deposit. However, it is possible to opt for an add-on CD, which allows additional deposits. Let’s take a detailed look at CDs and other great savings options.

Can You Add Money To Your Certificate Of Deposit?

Typically, CD’s do not allow individuals to add to their balance. Once you make the initial deposit, the balance will be locked in to keep earning interest until the maturity date. This is part of the reason that CDs do usually offer higher interest rates than other deposit account types.

When you invest in a CD, you commit to locking your money away for a specified period of time. You cannot add to the balance and there will often be steep penalties to pay when choosing to withdraw your money early. You will get a greater return on your deposit in exchange for less liquidity.

Other CD Options For Savings

If you’re looking for the low risk and great returns of a CD but want a bit more flexibility there are a few choices. There are two ways to contribute more money as time goes on: using the CD laddering strategy or buying an add-on CD.

CD Laddering Strategy

With a CD laddering strategy, you will purchase multiple CDs, each featuring a different term. For instance, you can invest in a CD with a six-month term and another with a one-year term. By diversifying your deposits, you can take advantage of the smaller commitments associated with short-term CDs. At the same time, you can enjoy the higher interest rates of long-term CDs.

As the CDs in your ladder mature, you may liquidate the accounts and bank both the principle and interest. Or, you can keep adding rungs to the ladder by renewing the CDs for another term, enabling you to earn more interest.

Add-On CD

Add-on CDs will differ from traditional CDs since they allow the depositor to contribute more funds to the account during its term. The terms of this type of CD can differ depending on where you purchase it from. Some institutions may have a maximum value the CD can have, while others could allow you to make a certain number of deposits during the term.

To maximize your add-on CD, it’s suggested to choose one with a longer maturity date – at least two to three years. As is the case with any CD offering, always shop around to find the best interest rates.

Alternative Savings Options

There are a few alternative ways to build your savings. These options offer greater flexibility than CDs. Depositing money directly into a savings account or opening an IRA can help you save and build your wealth over time.

Savings Accounts

Savings accounts generally offer higher interest rates than checking accounts. However, they are still usually lower than CD rates. You won’t earn as much money off your savings accounts, but you are free to withdraw your money at any time.

The FDIC insures savings accounts, so these are great options for individuals seeking the security of a CD without sacrificing liquidity.

IRAs

You should consider opening a traditional or Roth IRA alongside your 401(k). A Roth IRA is funded with your after-tax dollars, while the traditional version is funded via pre-tax income. Both of these IRAs allow you to withdraw money without penalty after the age of 59.

If you have any extra money left in your budget at the end of the month, funding IRAs can put you on a fast track to a comfortable retirement. The more time your funds have to grow, the larger they will be come time for retirement.

Tax Settlement in Mesa, Arizona

If you need IRS Debt Help, Tax Debt Settlements or Tax Debt Advising in Phoenix, Mesa or anywhere else, Tax Debt Advisors can help! Give us a call at 480-926-9300 or fill out our contact form for a free consultation.

The majority of tax audits will wrap up within a year. Let’s look at some factors that can either increase or decrease the amount of time a tax audit takes.

What Are IRS Audits?

A tax audit is when the IRS chooses to look into your tax return a little more comprehensive and verify that your income and deductions are true. Usually, your tax return is selected for audit when something you entered on your return is not common.

How Long Do IRS Audits Take?

As mentioned above, most of these audits will be completed within a year. There is a time limit for how long the IRS has to charge you or assess any additional taxes on the return being audited. This statute will expire three years from the due date of the return or the date when it was filed, whichever is later. For example, the statute would expire on April 15, 2026 for a taxpayer filing on April 13, 2023.

The IRS audit should be completed within a year, in most cases. Even though the IRS has three years to audit a return, the IRS likes to close audits well before the statute of limitations comes into play. The IRS does not have a statute of limitations if tax fraud is involved. When there is a large amount of unreported income, the statute is six years. However, the IRS rarely goes into an audit assuming an extended statute.

Types Of IRS Audits

There are three different kinds of IRS audits. These audits can take anywhere from just a few months to a year.

Mail Audits

No matter what kind of audit the IRS chooses to carry out, you will get notification of it through mail. A mail audit is the most straightforward kind of IRS review and doesn’t require you to meet with an auditor personally.

Usually, the IRS petitions for additional documentation to prove different items you reported on your return. For instance, if you claim $5,000 in philanthropic deductions, the IRS might send you a letter calling for evidence of your donations. Typically, submitting adequate evidence will complete the audit in your favor if the IRS is content.

Average time to complete a mail audit: 3-6 months. 

Office Audits

An office audit is a face-to-face audit carried in a local IRS office. This type of audit is usually more detailed than a mail audit and typically comprise of questioning by an audit officer about details on your return.

You will be requested to bring particular information to an office audit, like the books and records for your company or your personal financial institutional statements and receipts. You additionally have the right to bring a CPA or attorney to represent you during the audit.

Average time complete an office audit: 3-6 months.

Field Audits

A field audit is the most comprehensive kind of review that the IRS carries out. In such a situation, an IRS agent will carry out the audit at your home or business. Usually, field audits are done when the IRS is double checking more than one deduction. A field audit is typically very detailed and will cover a lot, if not all, issues on the return.

Average time complete a field audit: less than 1 year.

IRS Audit Time Factors

Here are a few factors below that will help you estimate how long your audit may take.

Adjustments Found

If the IRS auditor makes a lot of adjustments to your return, he or she will often look for more. This means the auditor may even look into other tax years, resulting in a longer process overall.

Pursuing Penalties

Oftentimes, the IRS will pursue penalties if they have to make lots of adjustments. This, of course, will extend the timeline of the process. If the IRS pursues fraud, the audit could last several years. The IRS pursues this action in only about 2,000 or 155 million cases each year, on average.

Small Business Ownership

It is undoubtedly harder for the IRS to track small business income. Auditors will have to review bank records, websites, accounts, and client accounting records. This extensive review can take several more months to complete.

Taxpayer Disagrees With Adjustments

You can take your case to IRS appeals if you disagree with the auditor’s findings. Going this route will usually tack on an extra six months to the case.

Tax Settlement in Mesa, Arizona

If you need IRS Debt Help, Tax Debt Settlements or Tax Debt Advising in Phoenix, Mesa or anywhere else, Tax Debt Advisors can help! Give us a call at 480-926-9300 or fill out our contact form for a free consultation.

Working remotely simply means you work somewhere other than your company’s office either some or all of the time. Working remotely, especially in a different state than your employer, will undoubtedly affect your tax situation. Let’s take a look at taxes when it comes to remote work.

How Do I Pay Taxes If My Employer Is Located In A Different State?

If your employer does operate out of another state, you typically will not have to pay two different sets of remote work taxes. Oftentimes, employee-based income taxes are based on the state where you generate your income, not where the revenue is ultimately generated.

However, there are a few states that double-bill individuals for taxes. These states are listed here:

• Connecticut
• Delaware
• Nebraska
• New York
• Pennsylvania

You can exempt yourself from this double taxation using the convenience rule, which says you may not have to pay twice if your employer requested you work in your current location.

How Can A Reciprocal Agreement Simplify State Taxes?

A reciprocal agreement exists between two states in order to simplify tax-gathering rules between one another. Under these terms, you will not need to file non-resident state tax returns. This means you only have to pay in one state.

As of the year 2023, there are 17 states that have reciprocal agreements, including the following:

• Arizona
• District of Columbia (DC)
• Illinois
• Indiana
• Iowa
• Kentucky
• Maryland
• Michigan
• Minnesota
• Montana
• New Jersey
• North Dakota
• Ohio
• Pennsylvania
• Virginia
• West Virginia
• Wisconsin

Non-Resident Vs Resident State Taxes

State taxes bill non-residents and residents differently. Here’s a quick look at how the two are different:

• Residents are taxed based on all income received while living in said state.
• Non-residents are taxed on the income they performed in the state and from sources of income received from those living in the state.

For instance, if you are a permanent resident living in Rhode Island, you will pay taxes on all income. However, if your employer is located in Nebraska, you will also pay taxes from that state.

If you happen to reside in multiple states and own a home in each of them, the place where you spend most of the year is considered your domicile state. Some states do not require any personal income tax, which means you do not have to pay there. You still have to file taxes for any income earned there most times, though.

Remote Work Taxes FAQ’s

Let’s take a look at some of the most common questions asked about taxes related to remote work.

Do I Still File Taxes In My Employer’s State If My State Has No Income Tax?

Always check your W-2 upon arrival. If your employer reserved income from your tax return in their state, but your state features no income tax, it means taxes have been withheld from your income. You may be eligible for a refund, at this time. In this example, you’ll want to file a return in that state.

Do I Need To File Taxes In Two States?

If your state and your employer’s state both feature income tax, be prepared to file in both states. You will file as a resident for the state that you reside in, and if taxes are withheld by your employer’s state, you will file a non-resident return for that state.

Are There Any Tax Deductions For Remote Workers?

You must be self-employed to deduct expenses related to your remote job. If you are working freelance or as an independent contractor, you can write off job-related expenses on your taxes.

Does Working Remotely Make Me Self-Employed?

No, working remotely is not the same as being self-employed. You are considered an employee if you receive a W-2 from your employer. Head to IRS.gov if you are unsure about your work status.

Do Remote Workers Qualify For Home Office Deduction?

This will be dependent on your employment status. For instance, the home office deduction only applies to self-employed taxpayers. You can write off a portion of your home office expenses if your situation qualifies you as an independent contractor.

Conclusion

This guide can be used as a great starting point for remote work taxes. However, you will certainly have to do more research when it comes to the two states of your choosing.

Tax Settlement in Mesa, Arizona

If you need IRS Debt Help, Tax Debt Settlements or Tax Debt Advising in Phoenix, Mesa or anywhere else, Tax Debt Advisors can help! Give us a call at 480-926-9300 or fill out our contact form for a free consultation.