How to Plan for Independent Contractor Taxes
Independent contractors can be people or entities who are contracted to perform work for another entity in a non-employee relationship.
Tax preparation is often a huge source of frustration for individuals, self-employed professionals, and small business owners. But it doesn’t have to be. If you’re fed up with using cheap, restrictive products like Turbotax, you’ll be happy to know that there are alternatives and other options. In this article, we’ll explore some of these different choices and how you can determine which option is best suited for your situation and needs.
The Downside of Using Turbotax and Other Cheap Tax Prep Software
Software like Turbotax is billed as a simple and intuitive DIY tax preparation solution that saves taxpayers time and money. But if you’ve ever used one of these services for anything more than the simplest of tax returns, you’ve likely experienced some of the problems that so often stem from these rudimentary platforms. Negatives include:
If you’re a single person with no assets, a single source of W-2 income, minimal debt, and few irregular circumstances, Turbotax might work fine for you. If you have assets, multiple sources of income, are self-employed, own a small business, and/or qualify for lots of deductions and credits, you’ll find it far too basic for your needs. It has a hard time reliably handling factors that don’t fit its pre-programmed model.
Requires accurate input.
Turbotax relies on accurate inputs from its users. If you accidently plug in the wrong numbers or mix up fields when inputting data, the platform will respond accordingly. This can lead to IRS letters, audits, penalties, amendments, and a slew of other unwanted and undesirable issues.
Easy to misuse.
Whether purposefully or unintentionally, Turbotax is easy to misuse. You might not know that you qualify for certain deductions or credits. It’s also possible that you file the wrong deductions or credits. At the end of the day, any money you save on tax preparation is lost in the form of higher taxes.
Requires user research.
Don’t have a CPA designation? You’re going to have lots of questions about how to properly handle different aspects of your return. When you use Turbotax, you’re left to Q&A forms, message boards, Google searches, and back and forth phone calls with tax “professionals” who generally lack the in-depth education needed to provide careful advice.
Lacks human touch.
At the end of the day, filing a tax return is important. Why subject yourself to using a lifeless computer program?
While Turbotax would be quick to offer counterarguments and defensive statements for each of these points - and they are getting better at addressing these problems - the reality is that they still fall way short of what most taxpayers need. There’s simply too much risk and not enough reward for the average individual to consider using a DIY product like this.
Determining the Best Way to Prepare Your Taxes
There isn’t a one-size-fits-all tax preparation solution that appeals to every American taxpayer. It’s up to you to consider the intricacies of your situation so that you can select the best possible option. Begin by considering how complicated your situation is.
Not complicated at all.
If you’re entering into adulthood and it’s just you living on your own with a single source of predictable income, your taxes aren’t very complicated. You’re the kind of person who can choose almost any method and not have to worry about negative ramifications.
Let’s say you’re married, had a child this year, and you and your spouse are both independent contractors. You also purchased your first house last year. Your situation would be described as moderately complicated. While Turbotax advertisements would like you to think their software is for you, you may want to pursue other options.
Perhaps you’ve just divorced, you own your own small business, and you generate a lot of income from stocks and real estate investments. You would fall underneath the heading of “extremely complicated.” There are lots of moving parts involved and you shouldn’t try to handle your own taxes. Doing so could result in missed opportunities and/or negative ramifications from the IRS.
It’s also wise to think about your past and any issues you foresee in the future. For example, have you been audited in a previous tax year? Or do you feel like you’re at risk of being audited in the future? While you can pay for some audit protection features with Turbotax, you have to question how well these features actually work. Most people find it more encouraging to have an accountant who they can meet with in person and talk to face-to-face.
You’ll also want to think about your schedule. Preparing taxes takes a lot of time. If you’re planning to do it yourself, be prepared to kill an entire weekend. If you have a side hustle or run a small business, the IRS anticipates you’ll need at least 19 hours to prepare your taxes! (Do you even have that kind of time?)
How involved do you want to be? If you’re someone who likes to be involved in every last detail of your tax return, feel free to file your own return. But most people would prefer to hand off the complex aspects to someone else. Consider this when you’re selecting which option you want to go with.
4 Turbotax Alternatives to Consider
While Turbotax might dominate the airwaves and suck up every minute of advertising on cable television, it’s far from the only option out there. Here’s a look at just a few Turbotax alternatives you can choose from:
There’s nothing stopping you from printing off the right IRS forms and filing your return by hand. If you have experience filing taxes, or you’re someone who has the time and interest to research all of the rules, then you can certainly try this method. (Warning: It’s extremely complicated and boring. Other than being free, there are virtually no advantages to hand preparing your own tax return.)
2. Tax Assistance
There are a number of tax assistance methods and programs out there that are designed to help people who have mitigating circumstances. The Volunteer Income Tax Assistance (VITA) program is one example. It relies on trained volunteers to help taxpayers complete basic returns. Taxpayers who earn less than $56,000 per year and people with limited English-language abilities generally qualify.
TCE, or Tax Counseling for the Elderly, is another assistance program. As the name indicates, this program helps older taxpayers and places an emphasis on pensions and retirement-related nuances.
3. IRS Free File
The IRS Free File program is a partnership that exists between the IRS and various commercial tax-preparation software. Based on income, you may be eligible to use these services for free. (However, be warned that each of these services is fairly comparable to Turbotax.
4. Human Tax Preparer
This leads us to the final option: human tax preparation from a qualified tax professional. While some people shy away from human tax preparation due to cost or fear of having to open up and be vulnerable about finances, this is definitely the best option. A CPA or human tax professional has the training needed to make smart, intuitive decisions. You can also ask questions, get answers, and follow up throughout the year with any issues that arise.
Let Taxfyle Connect You With a CPA
At Taxfyle, we’re committed to helping individuals and small business owners find and partner with the right tax professionals. Whether you’re looking for someone to help you file a return or offer specialized tax advice throughout the year, we’d love to get you in contact with an experienced professional who’s just right for you. Contact us today to learn more!
Get the latest posts delivered right to your inbox