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Independent Contractors and Taxes: How to Protect Yourself from the IRS


The Internal Revenue Service (IRS) continues to put the squeeze on independent contractors. Taxes are what fund the economy in part, and the IRS is targeting independent contractors who are below the radar for tax purposes. The IRS has coordinated with states to go after independent contractors harder than ever before. When working from home, you need to know that, and learn how to protect yourself from the IRS.

Sign Contracts Prior to Work

The IRS will either classify you as a contractor or employee for tax purposes. One way to protect your independent contractor status is to sign agreements with the companies and individuals you work with. Included in the agreement should be a standard independent contractor clause that reads something similar to this from

"Nothing contained herein or any document executed in connection herewith, shall be construed to created an employer-employee partnership or joint venture relationship between the Company and Consultant. Consult-ant is an independent contractor and not an employee of the Company or any of its subsidiaries or affiliates. It is understood that the Company will not withhold any amounts for payment of taxes from the compensation of Consultant hereunder. Consultant will not represent to be or hold itself out as an employee of the Company and Consultant acknowledges that he/she shall not have the right or entitlement in or to any of the pension, retirement or other benefit programs now or hereafter available to the Company's regular employees. Any and all sums subject to deductions, if any, required to be withheld and/or paid under any applicable state, federal or municipal laws or union or professional guild regulations shall be Consultant's sole responsibility and Consultant shall indemnify and hold Company harmless from any and all damages, claims and expenses arising out of or resulting from any claims asserted by any taxing authority as a result of or in connection with said payments."

It's hard to suggest that you're an employee with this language, but you have to be careful to not "act" like an employee either, even though you sign a contract with this type of language.

Keep Statements for Seven Years

Don't think you're off the hook because you don't get a letter from the IRS the first year or two after you file your taxes. Hold on to your bills, statements and records for seven years just in case the IRS wants to audit you. It's your proof of the expenses you paid when you take business deductions. Otherwise, the presumption is that you've acted fraudulently, and it's very difficult to prove you did nothing wrong without records.

File Estimated Taxes  If Required

Don't give the IRS any cause to penalize you. One step you can take is to file your estimated taxes if required, which are due on the 15th of January, April, June and September. You don't have to file estimated taxes, if you expect to owe less than $1,000 in taxes for that tax year.

Penalties and audits from the IRS is a primary concern to many independent contractors. Taxes won't go away, therefore it's important to do all you can to protect yourself from the IRS.

Daphne Mallory, Esq. is the co-owner of Mallory Writing Services and has written more than 100 articles helping home based business owners and entrepreneurs start and market their business. You can learn more about her here.

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