Close this search box.
Blog » Business Tips » Tax Laws and Consulting Work: What Service-Based Professionals Need to Know

Tax Laws and Consulting Work: What Service-Based Professionals Need to Know

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.

[Related: When Should Your Business Require an NDA?]

About Due’s Editorial Process

We uphold a strict editorial policy that focuses on factual accuracy, relevance, and impartiality. Our content, created by leading finance and industry experts, is reviewed by a team of seasoned editors to ensure compliance with the highest standards in reporting and publishing.

CEO at Due
John Rampton is an entrepreneur and connector. When he was 23 years old, while attending the University of Utah, he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months, he had several surgeries, stem cell injections and learned how to walk again. During this time, he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine and Finance Expert by Time. He is the Founder and CEO of Due.

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.


Top Trending Posts

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More