You might not think of yourself as a “small business entity,” but the Internal Revenue Service would beg to differ.
That’s because most USA Swimming athletes and coaches work as independent contractors rather than employees. In practice, this means that you’re paid an agreed-upon amount by USA Swimming, and, in turn, you are responsible for paying all taxes and any withholdings that may be required. That’s also true for any earnings you receive from competitions or paid sponsorships.
Your independence offers some unique opportunities, but it also comes with a lot of responsibility. That’s why it’s important that you keep track of all your income and are prepared to pay taxes on those earnings (less any business-related expenses, which we’ll explain further on). If you aren’t disciplined at setting money aside throughout the year, you could be in trouble come spring, when it’s time to file your taxes for the previous year.
Here’s an example: If you earn $50,000 and fall in the 25% tax bracket, you can expect to pay a $12,500 tax liability in quarterly or annual payments. If you haven't been setting money aside for that purpose, you could find yourself in a tough position — not to mention the tax penalties that come with missing those deadlines if you aren’t able to come up with the money to pay on time. Read on to learn more about how you can avoid these pitfalls.
Before You Pay Your Taxes, Deduct Your Expenses
One benefit of being an independent contractor is that you can deduct certain business-related expenses from your income. Just as you track your earnings and keep any payment documentation (in the form of paystubs or invoices) you also track expenses, which can reduce the amount of taxes you owe. Be sure to keep any receipts and invoices. Expenses include anything that is “ordinary and necessary for your business.” Some common examples include:
Health Club Membership
A Rule of Thumb for Estimating Taxes
As a general rule, set aside 30% of any income you generate for the purpose of paying your taxes. You can also pay estimated taxes on a quarterly basis rather than a lump sum at the time annual taxes are due. (Don’t worry: If you overpay during the year, the IRS will refund your money if you show overpayment on your Schedule C tax filing.) Paying quarterly estimated taxes can help keep you on track and ensure you don’t spend that money on something else.
Tips for Saving Money for Taxes
To make sure you have enough money to pay taxes and avoid any penalties, be disciplined and consider reserving 30% of any income received. Here are a few tips on how to set aside money to pay taxes.
Make monthly transfers from your checking account into a savings or money market account.
Split Your Deposit
As soon as you receive income, immediately split that deposit into two accounts, including 30% in a savings account.
Leverage Your Tax Refund
If you receive a tax refund, you can apply it to next year’s taxes.
Increase Primary Job Withholding
If you have a part- or full-time job where taxes are withheld, you can designate to have more income tax withheld from your paycheck.
A Closer Look at IRS Forms 1099 and W-9
As an independent contractor responsible for tracking and paying your own taxes, there are a few IRS forms you’ll come to know well. Here are the nitty-gritty details that can help you stay on track.
What is the
IRS 1099 Form?
Form 1099 is a document an employer or business entity must send to you prior to Jan. 31st for the previous tax year. Currently, they are only required to send you a 1099 if you earn more than $600 for the entire year. That means if you receive $500 for winning an event, you would not receive a 1099 from that event organizer. However, if an organizer hosted five events and you won a total of $2,500 paid by that organizer, you should receive expect a 1099. And if you earn over $600 from, say, 12 different entities? Then you’ll receive 12 separate 1099 forms. (Make sure you keep good records!)
What is an
IRS W-9 Form?
So how does a business entity know where to send your 1099? They’ll require you to submit a completed W-9 form before you perform a service or are employed by them. The W-9 is an official form furnished by the IRS for employers or other entities to verify your name, address and tax identification (or Social Security) number. The information collected by an entity on a W-9 form cannot be disclosed for any other purpose, under strict privacy regulations.
What forms are needed to pay taxes?
- 1099: The company(ies) you worked for will summarize the total amount they paid you on a 1099 at the end of the year. They have until Jan. 31 to issue these, so you should have them all by the second week in February. If you don’t receive one and think you should, follow up with that entity to make sure they issued it.
- Schedule C: You record your 1099 income, plus any related expenses (which returns to your business profit, i.e. earnings. Expenses = Profit). This profit is then subject to self-employment taxes and federal and state income taxes.
- 1040-ES: This is the worksheet for calculating quarterly taxes.
- 1040 and Schedule SE: Where you calculate and record year-end income taxes and self-employed taxes.
A Word About Penalties
What happens if you don’t pay on time or if you underpay? You’ll incur a 6 - 8% penalty on the amount you underpaid. For example, if you made $10,000 but didn’t pay the $2,000 in quarterly taxes, the 6% penalty on that $2,000 underpayment would be $120.
For help with tax issues and tax forms, contact your OneAmerica Financial Professional who can provide you with a referral to a qualified tax professional and/or point you in the right direction.
2021 Estimated Payment Schedule
Quarterly estimated taxes are normally due by the 15 day of the month following the end of a calendar quarter. However, due to Covid-19, that schedule was adjusted in 2020. If the schedule is followed for 2021, here are the due dates, including the payment due date for Q4 of 2020.
Because you are responsible for providing a W-9 form to any entity that might compensate you, here is a link to the IRS W-9 page that provides additional information and includes a link to download a W-9, which you can fill it out in advance and submit to employers upon request.
USA Swimming and OneAmerica have come together to offer you access to a financial professional, at no cost to you. A financial professional can help you create a personal economy including assistance creating a budget that takes into consideration your lifestyle and may help you achieve your short-, mid-, and long-term financial goals.
appointment with a