When a business sells products, taxes can be fairly straightforward. You price your items and pay taxes on the money you earn off of each sale. With services, however, pricing tends to be more ambiguous. You set a specific price for your offerings and claim your earnings, but unlike with product sales, your prices can fluctuate depending on the type of work you’re performing.

For consultants, that ambiguity only deepens. What qualifies as consulting work? What expenses can you reasonably claim as related to your business? As a consultant who works independently, you’ll be tasked with paying taxes on your earnings. It’s important to know the ins and outs of filing your taxes each year to keep your business safe from costly penalties.

Paying Taxes

As a consultant, you’ll be paid full price for the services you perform. You are then responsible for paying taxes on that amount. This is in direct opposition to the way salaried and hourly employees are paid, in which taxes are taken out of a worker’s paycheck before the employee sees it. As a consultant, you’re self-employed, which means you’ll be responsible for paying your social security taxes. This is done through a self-employment tax you pay on the amount of income you earn each year. Once you start bringing in regular income, you’ll need to start paying your taxes quarterly to avoid paying late fees each April 15.

Startup Costs

In the early years, a consultant often works without making a significant salary as he builds his business. During this time, you may feel inclined to skip claiming your expenses, since you don’t have a regular revenue stream. However, you can claim your expenses during your startup years, including the cost of your home office and any personal property you convert for business use. You can claim the expenses for up to five years, as long as you make money three out of those five years.

Completing Paperwork

When you begin a new work relationship with a business, you’ll be asked to complete Form W-9. If you hire contractors in the future, you’ll also be required to collect these forms for each worker. For estimated taxes, you’ll use Form 1040-ES and at tax time, you’ll use Schedule C. Whether you choose to do your taxes on your own or turn it over to a tax preparer, you’ll still need to track your expenses and income throughout the year and report this information to the IRS.

Meals and Entertainment

As a consultant, you can deduct the expenses you incur during the course of doing business, including 50 percent of meal and entertainment expenses. While this doesn’t mean you can simply meet up with friends after work and have a meal, there are some instances in which dining with friends applies. As a consultant, you’re likely at least occasionally asked to meet with someone who wants to “pick your brain.” When that request comes from a close friend, you likely will opt not to charge for your time. Whether you charge or not, you can still deduct half your meal cost as long as the conversation that occurs along with that meal is related directly to your work.

Consultants have the freedom to set their own hours and work with the clients they choose, but calculating and paying taxes each year can be complicated. Through tracking income and expenses throughout the year and having your paperwork in order, you can make the experience less painful and reduce the amount you owe each year.

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Best known as an Entrepreneur and Connector. John was recently named #2 on Top 50 Online Influencers in the World by Entrepreneur Magazine as well as a blogging expert by Forbes. He is the Founder and CEO of Due.

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