As an independent contractor, you have the freedom to access your finances and allocate them however you choose. Since federal taxes, state taxes, Medicare and Social Security funds are not taken out of your paycheck, you have more flexibility to play around with your finances up front. Yet when tax time comes around, it is important that you are not left struggling to come up with the money necessary to pay back the state and federal government. Organizing your finances as a self-employed contractor is vital, and can make all of the difference when annual tax time arrives.
As an independent contractor, the money you make may go into a business account rather than your personal checking account. Business expenses may then be taken from the account and you may pay yourself from the account as well. When you prepare your taxes, the expenses used for your business may be deducted from your business income, thereby lowering the taxable amount. It is important to understand what type of business expenses qualify for business deductions and what items should be left for personal use. Make sure that you document your business expenses in case more specific clarification is needed.
Rather than fill out a W-2 form for your taxes, as you would if you were employed with another company, you will need to fill out a 1099-MISC form for independent contractors. You may receive a form for each of your clients, with the amount you made from those transactions during the year. In order to pay your self-employment taxes, you can use your business account or split the amount owed into quarterly payments.
This information is intended to educate and should not be taken as legal advice.