As the COVID-19 pandemic has shifted more and more work situations to contract, freelance and other self-employed businesses, working as a consultant is a growing career option for many. If you start your own consulting business, your tax situation will be much different than when you worked as an employee. Reviewing how to claim consulting income on taxes will help you make sure you don't overpay each year.
What's Your Business Structure?
One of the main things that will affect how to pay taxes as a consultant is your business structure. Many consultants work as sole proprietorships, limited liability companies or partnerships. These give you many of the benefits of a more formal business setup without requiring you to file two sets of taxes and deal with other types of paperwork issues.
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If you do not incorporate, the money you earn from your consulting business goes directly to you, personally, and you pay personal income taxes – not corporate taxes – on whatever you earn. For this article, we will assume you are filing one set of taxes as a consultant who is not a corporation.
Consider Also: Form 1040: What You Need to Know
Determine Your Income
As you begin preparing your tax return, list all your sources of income. In addition to your consulting income, you'll need to list any taxable capital gains you had from investments and money received from other sources of taxable income. Remember, you're filing as an individual, so you'll need to declare all of your taxable income.
Not all income you receive is taxable. For example, if you receive a gift from your parents (up to $15,000 in individual gifts and $16,000 in 2022), that's not taxable income. If you receive multiple gifts like this, there's a limit on how much you can receive in any given year, and over the course of your lifetime, tax-free – check with a tax professional to stay current.
Consider Also: Guide to Home Office Deductions
Determine Your Expenses
List all of the expenses you had related to your consulting business. This can include travel, marketing, internet, insurance, phones, home office and other costs directly related to and necessary for running your business. Make sure to work with a tax professional to understand mileage, home office, meals and entertainment, travel and other business-related deductions.
Consider Also: What Is a Schedule C Form: Who Needs to File & How to File
Use Schedule C
If you file your taxes using Form 1040, you claim your business income and expenses on Schedule C. If you returned any money to clients, list this return on line 2 of Schedule C. Even if you take the standard deduction instead of itemizing, you can still list individual business expenses on Schedule C. These are not itemized deductions, they are business expenses.
If you received any 1099 statements from clients, showing the income they paid you, you do not need to attach these to your tax return, as you would with a W-2. You don't need to attach receipts to your tax return for your expenses, but you should keep them in the event you're ever audited by the IRS.
Handling Pre-Paid Taxes
If you work for yourself as a consultant, you might be required to pay quarterly estimated taxes, rather than paying all of what you owe on April 15. This will include your payroll taxes. As an employee, you see FICA taxes of 7.65 percent deducted from your paycheck each time and see a matching 7.65 percent contributed by your employer. As someone who's self-employed, you'll pay the entire 15.3 percent of your SECA tax (vs. FICA tax).