It’s Tax Time--Are You Ready? Tax Tips for Independent Contractors
By Mary Geisenhoff
(For more information on reporting requirements and your taxes, please consult a qualified accountant or tax professional.)
If you work as a translator or interpreter, you are probably working as an independent contractor, the classification used for tax purposes. That means you choose your own hours, as well as with whom and on what you work. Instead of receiving a paycheck from your employer, an independent contractor usually bills the client, who sends payment at a later date.
Generally, independent contractors will use Schedule C when preparing their taxes, which are filed along with Form 1040. You will also have to file Schedule SE (self-employment tax) to make sure that Social Security and Medicare taxes are paid. If you make more than $400 a year from your translation business, you are required to declare it as income on your tax return.
As tax time is upon us, there are several tax issues and deductions that are particular to translators, so let’s explore a few essential things to remember.
Keep Adequate Pay Records
Have a good, reliable system for recordkeeping. It could be electronic or paper, whichever works best for you. Anytime a client pays you more than $600 in a year, he or she is required to provide you with a Form 1099 at tax time showing the amount paid to you. However, don’t rely solely on receiving this, as you may have many assignments paying less than $600, for which you will not receive a Form 1099. Make sure you always reconcile your own records with 1099s received.
It’s important to know the date you were actually paid. Under the cash method of accounting, which is the one most commonly used, the IRS counts the day the funds were made available to you, and not the day you actually put them in the bank. For example, if you were paid on December 24, 2014 but never deposited the funds until January 2, 2015, the funds would need to go under income for 2014.
Also, if you have subcontracted with anyone and paid them for work completed, you should include this as part of your contract labor expenses. You don’t have to give your subcontractors a Form 1099 unless you paid them $600 or more during the year.
Dues, Professional Certifications, and Classes are Deductible
You can deduct the cost of dues to any professional organization connected to your work. Classes are deductible if they are related to the business you are in, regardless of whether they are required or not. For example, you can deduct the cost of a 40-hour required course, as well as a medical terminology course you take to enhance your knowledge.
Working Out of the Home
Don’t forget to deduct the cost of your home office when working out of the home. The deduction is a percentage of the total square footage of your residence. You don’t have to own a home to deduct this space. If you are renting, you deduct the percentage of the space that is used for business purposes. You cannot deduct the cost of the kitchen, however, if you do your work on a laptop on the kitchen table. The space must be a dedicated space used for home office purposes.
If you’re working outside of the home on assignment, you can deduct the cost of meals. Generally, the IRS allows 50% of the cost of meals to be deducted if you incur them while engaged in business purposes. If you buy a meal for a client while discussing business-related issues, this same limitation applies.
Always keep track of your mileage to and from assignments or business meetings. There are many methods for doing this, including a daily written log, a spreadsheet on the computer, as well as mobile apps to make this task easier. Total your mileage as you go along--don’t wait until the end of the year to figure it out.
You can use your car for personal purposes, but only the business mileage percentage is deductible. Write down your odometer reading at the beginning of the year and at the end. Subtract your business miles from this, and you have the percentage of business use for your car. This figure could be helpful for certain IRS deductions.
Conferences and Meetings
Transportation costs, registration fees, and accommodations are all deductible. Half of the cost of meals can be deducted (as long as they were not included in your registration fee). An easier way may be to use the standard meal deduction based on the area in which you travel. You can use this on any meals for which you pay that were not included in registration costs. On your departure and return date, however, you are allowed only a portion of this daily amount.
Medical Insurance Premiums and IRA Contributions
Any medical insurance premiums you pay for yourself can be deducted on Schedule C. If you have set up an IRA, contributions are tax deferred until distributions are made at retirement age.
The general rule followed by the IRS is that you can deduct the cost of a phone only if you have another line that is for personal use.
Office Supplies and Equipment
You can deduct the cost of ink and paper and other supplies used in your business. If you use your computer, fax, or printer for business and personal use, you can deduct a percentage of the business use. You can figure this out by dividing your waking hours by the number of hours you usually spend working. For example if you are up at 7:00 am and go to bed at 11:00 pm (16 hours) and spend eight hours working, your business total would be 50% (16/2 = 8).
Big Equipment Purchases
If you have larger equipment purchases that you expect to use for more than one year, you can depreciate, rather than deduct, this expense. To figure this out, divide the cost by the life expectancy (determined by the IRS). For example, if you buy a new office chair that costs $300, it will have a depreciation life of five years, so generally you can deduct $60 per year. Some examples would be translation software, office furniture, computer, printer, and fax, if used more than 50% for business use.
The Bottom Line
In summary, you take all of your income, subtract the expenses, and you will have your net profit for the year. The net amount often does not seem like a lot after you deduct all of your expenses. However, being an independent contractor means you can deduct many things you cannot deduct as an employee, such as mileage and office supply purchases, leading to a much lower net profit. So, besides doing what you love and working within your own time frame, there are many benefits. However, there are also many responsibilities and bookkeeping tasks that are often put on the back burner due to lack of time or disinterest. After all, most of us would rather be exercising our language skills than organizing our pay and mileage records.
So, remember: you will be glad you kept good records and maintained well-organized filing systems when tax time rolls along. You won’t have to look far for documents and records, and you can have more time to devote to what you love doing.
Quick Tax Facts
1. You can deduct the cost of dues to any professional organization connected to your work.
2. You can deduct the cost of your home office when working out of the home so long as the space is dedicated for office use. The deduction is a percentage of the total square footage of your residence.
3. The IRS usually allows 50% of the cost of meals to be deducted if you incur them while engaged in business purposes.
4. Transportation costs, registration fees, and accommodations for professional conferences are all deductible. Half of the cost of meals can be deducted (as long as they were not included in your registration fee).
5. If you use your computer, fax, or printer for business and personal use, you can deduct a percentage of the business use.
6 Any medical insurance premiums you pay for yourself can be deducted on Schedule C.
7. For more information, please see information for self-employed individuals provided by the IRS at www.irs.gov/Individuals/Self-Employed.
About the Author
Mary Geisenhoff started her own freelance business, MG Communications, in 2011 to dedicate herself to writing and to Spanish-English interpreting and translation. Besides being an active medical interpreter and translator, she works as a tax professional during tax season. One of her favorite topics is writing about tax-related issues and their implications for businesses. She has a BA in speech communication and Spanish and is a certified medical interpreter. Contact: firstname.lastname@example.org.