Tax Planning

Everything Consultants Need to Know About Paying Taxes

by
Sonu Shukla
on
8/28/2022
Everything Consultants Need to Know About Paying Taxes

Whether you spent years of your life working in a specific industry and you’ve decided to take a step back from the daily grind by becoming a consultant, or consulting is what you’re building your career around as an expert in a particular field, paying taxes can be a challenge.

The vast majority of consultants across all industries are self-employed, which affords them – and you, if you fall into this category – a huge degree of freedom regarding when they work, who they work for, and what projects they accept. On the flip side, of course, is the fact that self-employment taxes can be immensely complicated. 

Here, you’ll discover the top tax-paying tips for consultants, no matter what industry you focus on. 

Understand Self-Employment Tax

The first thing you need to be aware of is that self-employment tax is different from taxes paid by W2 employees whose taxes are withheld from their paychecks – as a consultant, the odds are good that you will need to withhold your own taxes. 

The IRS notes:

Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

p>The agency also points out that the current self-employment tax rate is 15.3%. This rate is comprised of two parts, 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

In 2021, the first $142,800 of a self-employed person’s combined wages, tips, and net earnings are subject to “any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement tax.” In 2022, this rate increases to $147,000.

Take Advantage of Tax Deductions

If your mind is reeling from the amount of taxes you’re likely to owe as a business consultant, don’t fret. There are plenty of tax deductions available to you as a self-employed individual. 

If you’re worried you won’t find all of the deductions for which you are eligible on your own, make sure you hire a reputable tax professional in your area. This will make things much easier at tax time year after year!

Self-employment tax deduction 

Taxpayers are allowed to deduct 50% of their self-employment tax each year, equivalent to what an employer’s portion would be if they worked for a company.

Operating costs

As a consultant, you probably have various operating costs to keep your business running. Things like rent for a physical office, internet service, phone plan costs, utility bills, and software programs that are necessary for your consulting firm’s day-to-day operations can all be deducted. 

Continuing education

In certain cases, consultants can qualify for tax deductions related to continuing education or career advancement. If you are currently enrolled in a qualifying college program, you may be able to take certain tax deductions. Furthermore, some seminars, industry-specific conferences, and professional certification programs are also eligible.

A recent court case set a precedent for self-employed people who travel for their jobs. If you drive to clients’ offices or put mileage on your vehicle for another consulting-related reason, you may be able to take tax deductions as a result. 

Pay Estimated Quarterly Taxes

As a general rule, people who work as consultants should pay estimated quarterly taxes to avoid being hit with a huge tax bill in April. 

In 2022, small business owners must submit their quarterly taxes on or before the following dates:

Payment 1: April 18, 2022

Payment 2: June 15, 2022

Payment 3: September 15, 2022

Payment 4: January 17, 2023

Remember, if you are not filing online, as long as your tax payment is postmarked by the due date, the IRS will consider it on time. 

Do you work with a qualified tax professional to help you with your consulting taxes?

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

SONU SHUKLA, CPA, P.A.
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