by Louise M. Felsher, CMP, CMM, and Greg Leigh, CPA | March 01, 2005

Almost every planner dreams of opening up her own independent shop. Although there are many benefits, such as flexible schedules and being able to work from home, anxiety about filing small-business taxes often can be a deterrent to embarking on a solo career.
    The transition to independent tax filing is not so traumatic, especially with help from a certified public accountant. The cost is about $100 per hour, but the expertise will pay for itself in dollar and time savings, not to mention peace of mind.
    But even with an expert at your side, it’s wise to be well informed. The following advice will help planners who work alone as independent contractors (not those who have set up a small business that employs other planners).

Get the Forms
Independent contractors are required to file the 1099-MISC form at tax time. They also must file estimated taxes on a quarterly basis if their income for the year will be more than $1,000. These payments are due on April 15, June 15, Sept. 15 and Jan. 15. If this is your first year on your own, base the payment on 90 percent of your income so far; e.g., April 15’s payment would be based on 90 percent of your income from January through March.
    Once you’ve been in business more than a year, determine your estimates based on 100 percent of how much you made the year before.
    Be prompt: The penalty for filing late is 5 percent of the unpaid balance per month.

Watch Your Words
Be aware the contracts you establish (verbal or written) with new clients can affect your tax returns. Depending on the wording, certain expenses associated with the work can be deducted, provided they do not compromise your independent relationship with the client.
    But if your client supervises your work or creates an employer/employee relationship, those associated expenses are not deductible.

Keep Records
Accurate record-keeping is critical. Expandable files work for some, or try a three-ring binder with dividers and clear page protectors. Staple receipts of similar categories chronologically onto blank paper and slide them into the page protectors. Keep photocopies of all receipts in a fireproof safe.
    A common error independents make is not keeping adequate records. For help, two IRS publications 583, “How to Set Up a Business and Keep Records,” and 535, on general expenses are available at

Deduct With Care
The IRS allows “ordinary and necessary” expenses associated with business activities to be deducted. Red flags go up for exorbitant “client entertainment” costs; similarly, purchasing top-of-the-line equipment could flag you.
    As a general rule, be conservative. Do your due diligence when purchasing equipment (retain bids for computers, for example), and document how you determined which equipment was right for your business.
    Club dues and association memberships for business purposes, pleasure or any other social purposes are not tax deductible. There are exceptions to this rule (see publication IRS 535, page 55).
    If you drive around while doing business, the standard mileage rate (currently 34 cents per mile) is applied for the use of your vehicle. Keep a log tracking these car trips.

Count Your Space
Many times a home office space is deductible as a percentage of your rent or mortgage; rules vary from state to state. For more on home-office parameters, see “Tax Factor,” June 2003 (Tax Factor).

Louise M. Felsher, CMP, CMM, is senior vice president of event marketing for The Wilkinson Group in Burlingame, Calif. Greg Leigh, CPA, is a San Francisco-based accountant.