As the year comes to end and we begin a new year, a necessary evil lurks just waiting to strike – tax time. I begin looking for the various forms that either come in the mail or email or we can now download. The W-2 and some other forms cover employment, and still other forms cover potential deductions. As employees, we have our taxes withheld from our paycheck. However, as independent contractors or freelance workers, we do not have taxes deducted. Therefore, we must keep track of the income total and the taxes due throughout the year and plan accordingly as we prepare our tax returns. Failure to do so will result in devastating refund reduction or extra taxes due.
From 1998-2003, I supplemented my income by tutoring. At only $15,000 – $22,000 full time then, I really needed the extra wages. The tutoring job paid $20.00 per hour, and I worked enough hours to average over $700 more. Throughout the school year, I could make over $7000 in extra income, which looked great in the checkbook. However, I worked as an independent contractor, so I did not have taxes withheld. The manger told me this, but at the time I did not understand much about how taxes worked for independent contractors.
Forms W-9, 1099, and Schedule C
In the spring of 1999, I sat down to prepare my tax return. I knew Form 1040 well enough, and in previous years I had learned about itemized deductions. Forms W-9, 1099-MISC, and Schedule C, however, were brand new to me. (See sample forms from www.irs.gov by clicking each link.) I had already turned in my W-9, so I had no problem there. Then, I received Form 1099-MISC in the mail. This form showed that I had no taxes withheld from tutoring and that I would have to pay them myself. I then obtained a Schedule C from the post office. At first, the form intimidated me, but as I filled it out, I understood it quite well.
Inexperience cost me
Since I did not plan ahead throughout my tutoring months of 1998, I was shocked at how much that income affected my tax return. I did not pay attention to it, so I did not expect the amount of tax that I would have to pay on it. We received a far lower refund than I had anticipated. I vowed to keep track of that income from then on as long as I tutored. The next four years showed much better results as I learned to calculate and save the correct amount for taxes out of each subsequent paycheck.
I stopped tutoring in 2003 when I began my master’s degree program. From then until mid 2011, my wife and I worked only as employees for each paycheck we earned. Therefore, we did not have the same hassles with the independent contractor forms.
In June of 2011, I became a Hubpages Contributor. As much as I love writing for Yahoo!, I did not expect the income that I have made from it. I have surprisingly made much more than I expected, and I save that money for the summers when we have less income. Simultaneously, I must remember that as a freelance writer, I will have tax responsibility very similar to what I had as an independent contracting tutor. Once I reached $500 for the year, I became responsible for taxes. I understand the tax liability, and I have already planned for it as I began organizing my checklist of tax forms for the year.
Worth the effort and cost
Throughout each year, I still keep track of how much income my wife and I both earn, and we know the difference between gross pay and net pay. We still make sure that we have money available in case of owing extra taxes in the spring, and we give thanks for any refunds that bless us. We know that the freelance income will reduce our refund, but we will still come out well ahead. Earning income for something that I truly enjoy makes the extra paperwork and even the tax liability worth the effort and cost.