The taxman cometh—and in 2019 he’s making some changes to the tax code and eyeing independent contractors (ICs).
So in hopes that your hassles are few and your refund is large, here are some tips to get you through the season as quickly and easily as possible.
Be Aware of the Rule Changes for 2019
Most of the tax code changes resulting from the 2010 Affordable Care Act Tax Cuts and the Jobs Act of 2017 took effect last year, but a few are changing for 2019. The biggest is in the threshold for deductible medical and dental expenses, which is rising to 10 percent of adjusted gross income (from 7.5 percent last year). Alimony is no longer a deductible expense, and payees will not have to claim alimony payments as income, for divorce decrees signed after December 31, 2018. And the shared responsibility payment, a penalty for those who did not have health insurance last year, has been phased out for 2019. (But if you have health insurance, be sure to deduct it as an expense. One of the most frequent errors of small-business owners in 2018 was not deducting their health and life insurance premiums, the IRS says.)
In light of California Assembly Bill 5—and similar bills proposed in New York and New Jersey—travel agencies and advisors should take care to meet the requirements that exempt their ICs from the new regulations, says attorney Sue Bendavid at Lewitt Hackman in California. Make sure your IC agreements underscore that your relationship is truly business-to-business and independent, and that you do not control the ICs with whom you work. If they are incorporated or an LLC, or if they have a business license with the city or an insurance policy in their own name, print it out and keep a copy. Review your ICs’ marketing materials, website and business cards to make sure everything clearly states they are independently owned and operated, and not part of your agency. If they sit in your offices, consider separating them in some way from your employees and charging them a fee, to emphasize that they are a separate entity.
Use the Tax Withholding Estimator
The IRS website offers a Tax Withholding Estimator that you can use to quickly estimate whether your withholdings have been on track, and Form 1040-ES, Estimated Tax for Individuals, has a worksheet to help figure out your payments. The final quarterly payment for 2019 is due on January 15, 2020. If you owed money last year or expect to this year, paying down your debt now will save you penalties later.
Gather Your Documents and Organize Your Tax Records
Keep copies of filed tax returns and all supporting documents for at least three years, including year-end Forms W-2 and 1099, other income documents, records documenting all virtual currency transactions, and receipts for expenses you are claiming. Note that detailed receipts—not credit card bills that show just the total—are required, and since printed receipts from stores and restaurants fade in time, make copies so they will be legible if you need them. Review all your forms as you receive them to make sure the information is correct. Notify the IRS of address or name changes to avoid refund delays.
Stash Some Cash for the Future
New limits—raised for the first time since 2013—allow taxpayers to make larger tax-free contributions to 401(k) plans and individual retirement accounts (IRAs). The limits for 2019 are:
- 401(k) base contribution: $19,000 (up from $18,500 last year)
- 401(k) catch-up contribution (for taxpayers age 50 and older): additional $6,000 (unchanged)
- IRA base contribution: $6,000 (up from $5,500)
- IRA catch-up contribution (for taxpayers age 50 and older): additional $1,000 (unchanged)
Limits on health savings account contributions also have been raised, to $3,500 (up from $3,450 last year) for individuals or $7,000 (up from $6,900) for families.
Note the Small-Business Deduction
The IRS in 2018 rolled out a 20 percent deduction on earned income for flow-through entities, including sole proprietors, partnerships and S corporations. If you earned $20,000 selling travel part-time, for example, you can automatically deduct 20 percent, or $4,000. Some income limitations apply, though.
Know Your Write-Offs
Independent contractors who work from home can write off a portion of their house as a home office, but employees of an agency who are paid by W-2 cannot. If you work from home, you can claim a flat $5 per square foot used in your office, up to a maximum of $1,500, or you can pro-rate the footage of your home offices versus the square footage of the entire house. In either case, though, the home office must be used exclusively for work—so stash the gym equipment elsewhere. You also can expense mileage on your car and expenses for attending FAM trips, but you must keep a careful log of where you went and why. The experts say you should have a separate credit card used only for business expenses.
File Electronically and Use Direct Deposit for Refunds
A variety of free electronic filing options are available, including IRS Free File for taxpayers with income below $66,000 and Fillable Forms for those who earn more. Taxpayers who generally earn $56,000 or less can have their return prepared at a Volunteer Income Tax Assistance site, and Tax Counseling for the Elderly sites offer free tax help for all taxpayers, particularly those who are 60 years old or more.
Be Careful Out There
Your Social Security and credit card numbers are likely floating in the ethernet somewhere, but don’t give thieves any more leverage than they already have. File early to ensure that no scammer beats you to the punch and collects a refund meant for you. Always use a secure server when sending information to an accountant or the IRS, and make sure your accountant is equally careful. And of course, no, Virginia, that is not the IRS on the line. Never give your social security or credit card number to anyone who calls you out of the blue.