Contractors (or freelancers) are people that work for themselves, undertaking jobs and projects for their clients on an on-demand basis. Unlike regular employees, contractors do not have taxes withheld from their income by an employer, meaning that they have to submit their taxes at the end of every tax year. As a contractor, there are a number of important tax laws that must be adhered to in order to operate self-employed, and additionally there are also many elements of your job for which you can claim tax back. Take a look at our top tax tips for contractors.
If you are a contractor using an umbrella company, you could save on tax contributions by working through your own limited company. Not only will this give you a larger amount of money to take home, but it will also allow you more benefits on tax relief for certain elements of your business. Creating your own limited company takes less than 10 minutes online, and you could have the process finalised within two hours.
Furthermore, the paperwork and administration surrounding your new limited company isn’t as much as you think. A good accountant would only need around 20 minutes every month to organise the admin for your company, and depending on their experience they could even help you to understand IR35 compliant contracts.
Understanding what and what not to claim for is a great way to improve your limited company. The expenses booklet from HM Revenue and Customs is over 100 pages long, and it’s no wonder many people continue to be confused about what tax breaks affect their business. A little research goes a long way, but if you’re still not confident with what you’re claiming, have your accountant simplify it for you.
In order to avoid hefty fines, make sure you submit all your tax paperwork on time. This is one of the best tax tips for contractors, however many people still fail to organise their time to do their returns. For a company worth £20m, a £300 fine is pretty insignificant, but if your limited company is a new start up, then these fines could burn a hole in your bank balance.
Separate Bank Accounts
Never leave large amounts of money in one single bank account. In order to avoid tax on your profits, make sure you split your business funds between separate bank accounts. Some high street banks don’t charge to use their business banking services, and there also some good rates to be found as well. Accountants for contractors are very experienced in ways to save money on tax, so ask for advice before placing your business funds in separate bank accounts.
If you have a legitimate reason to shut down your company and cease trading, there is a special government tax scheme that could reduce your liability for tax down to 10%. This scheme is hard to access, so make sure you speak to your tax advisor or accountant before applying. Furthermore, your business will have to have been trading for over a year to make you eligible for this scheme.
Running a business entails a lot of work that can lead to stress if not managed properly. Sometimes even small things like paper work can cause undue stress to a business owner. Some paperwork can be done without breaking a sweat but their combined volume still amounts to a lot of work. Other documentary requisites like tax forms need accurate entries and meticulous screening. Business owners can unburden themselves with this tedious task by getting tax preparers. But how does one choose the right person for the job?
The high demand for tax professionals or tax return preparers during the peak months of the tax period makes tax preparation a lucrative job for some people. As such one can easily find a tax preparer from referrals or from reputable online sites. The first thing that should be considered in hiring tax professionals is their qualifications. CPAs, tax lawyers and accountants are the most qualified ones to do the job but there are also college degree holders or high school graduates with special courses on tax laws that work as tax preparers. Those who have affiliations with professional organizations is a plus factor because they are more likely to be updated with the tax laws and they are bound to the organization’s code of ethics. Qualified tax preparers have a Preparer Tax Identification Number or PTIN which should be included in the tax forms that they signed and filed. Aside from the basic qualifications, one should also check the background of the tax professional. The Better Business Bureau keeps a record of licensure status and disciplinary actions for enrolled tax agents.
Hiring a tax professional can ensure that the business owner doesn’t overpay on taxes and that all federal requirements for tax filing are met. However, this doesn’t mean that they should be complacent with the services of the tax preparer. Ultimately, it is the tax payer’s responsibility to ensure the accuracy of the forms they file. Even with a well chosen tax professional business owners should still double check the forms before signing.
Starting a small business is a good way to earn some extra income for one’s self or their family. People who have a knack for it sometimes start their entrepreneurial career as early as they can count and learn the value of money. Running a lemonade stand during summer or selling Girl Scout cookies for fund raising can be a fun activity for the enterprising kids, but adults who would like to have their own businesses need to put in some serious work in it. For starters, they would have to learn about the legal and tax requirements for putting-up and running a business.
Learning about the legal and tax requirements for establishing a business can be quite tedious and sometimes confusing. Tax laws vary based on the type of business that one intends to get into. It is also dependent on the country or locality in which the business is to be placed. Some countries are lenient with business licensing or registration procedures while others are stringent, but in most cases a business should be registered in the local business licensing office before it can operate.
Business owners are also required to pay taxes and file tax forms within given deadline or they will be penalized. In general, there are four types of business taxes, The Income Tax, the Self-employment Tax, Employment Tax, and Excise Tax. All income earning individuals and entities are required to pay an income tax whenever an income is earned. This is usually paid and filed on a monthly, quarterly, and semi-annual basis with the annual income tax return filed at the end of the year. In the US, a Self-employment Tax is generally imposed on individuals working for themselves. Most businesses require employees to operate, thus, it is the responsibility of the employer to pay employment taxes that covers Social Security and Medicare Taxes, Withholding Tax, and Federal Unemployment Tax. Excise taxes are imposed on some business sectors that are required to settle environmental taxes, fuel taxes, and communications tax among others.
One can easily get lost in the jumble of taxes that are defined in the Internal Revenue Codes. It is always best to inquire from ones business licensing office to get a more accurate picture of the tax laws that are applicable to the type of business that they plan to get into.
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