With every new year comes a new tax season, sending chills up independent contractor's spines across the US. Unlike most people who enjoy a refund this time of year, landmen can usually expect to be emptying their bank accounts and forking over thousands in taxes. Thankfully, there are plenty of write-offs to help offset tax expenses. Unfortunately, however, these write-offs can sometimes lead to an audit.
The IRS Is Taking a Closer Look at Landmen This Year
Landmen in particular get a lot of heat from the IRS when it comes to taxes and employee classification. Recently, the IRS has investigated whether or not landmen can actually be classified as independent contractors. Why? Firstly, it's common that independent contractors under report income and over report expenses. Obviously, the IRS doesn't like this.
Secondly, many independent contractors fail to pay taxes on a quarterly basis. While this may not seem like a big deal at first, it's actually a bane to the IRS because it means the organization has to wait until the end of the year to receive those funds. On the other hand, with employees, the IRS takes taxes out of each paycheck on a regular basis.
The IRS has hired 300 new investigators to examine independent contractor misclassification. It has deployed intelligent software that analyzes organizations with a large number of 1099 workers. That means your odds for getting audited have increased. One of the first places the IRS has started looking is the oil and gas industry, and it starts with landmen. When you do your taxes this year, beware these red flags that might trigger an audit.
Your Income Has Changed by a Lot
When your income changes drastically in a one-year period, the IRS takes that as a sign you might be or might have been underreporting. The IRS looks at your historic tax data, and so should you. If the difference in your income is significant, go back over your report to see if you missed anything before submitting.
You Claim Expenses like a Home Office
If you're an independent contractor, you likely have a lot of expenses—including a home office. While you can claim those expenses, doing so tends to raise eyebrows. The IRS is skeptical of self-employment deductions. Keep all expenses documented. If you do get audited, you can back up your claim easily.
The IRS is very particular about how taxpayer's can write off expenses like home offices and car loans or mileage. For example, your home office is only considered so if it's used exclusively for work. If you work at the kitchen table with your morning coffee, you can't claim it as an office. Be extra weary of what and how you claim expenses, and always maintain your records.
You Donate to Charity Often
Did you donate to charity this year? That's excellent. Unfortunately, if you didn't keep the receipts, you can't write donations off as a deduction. Many people inflate their donation expenses every year, so the IRS keeps a keen set of eyes on this particular deduction. Don't even think about writing off a donation if you don't have the receipts to back it up.
You Miscalculated or Forgot a Form
Whether you do your taxes manually or use a software program to do them for you, always check the numbers and forms. For many people, one W-2 or 1099 is all they have to file each year. But if you make additional income from rental properties, second jobs, alimony, and other sources, you'll have more forms to fill out and more numbers to crunch.
Obviously, this can get confusing as the papers pile up. Unfortunately, one missing form or incorrect calculation is enough to send the IRS knocking on your door. Before you send in your report, give it a good once-over (or thrice-over) to make sure everything is correct.
Pay Less Next Year (The Legal Way!)
Fortunately, there are several legal ways to reduce your taxes while self-employed. Some of these include delaying income, creating a SEP IRA, or starting an LLC or S-Corp. Starting an LLC in particular is one of the most effective ways to reduce your self-employment tax. This year, pay special attention when filing your taxes—and good luck!
