Independent contractors are often on their own when they have to do their taxes -- and this can lead to some significant mistakes. If you want to be conscientious about your taxes, the best thing to do is to consult with an accountant before the tax year is over, rather than when you actually need to complete your tax return.
1. Not Booking Their Expenses for Fear of Audit
The idea of an audit is terrifying to most, but many independent contractors are especially frightened of it because their tax return is more complicated than a normal 1040-EZ. Some of them will reduce or even eliminate their expenses because they don't want to trigger a "red flag" and get audited. But an audit isn't the end of the world; in fact, not only is it rare, but it's not always a bad thing. An audit can even come out in your favor. You should never hesitate to list legitimate expenses. The worst that will happen is that an audit will occur, the auditor will discover a mistake, and you'll be charged for the mistake. If it wasn't intentional and obviously so, you won't get into any trouble at all.
2. Assuming If They Make More, They'll Be Charged More
You've heard about "getting bumped into a higher tax bracket," right? And it sounds awful. But that's not really the way our taxes work. Some contractors try to stop making money after a certain point because they think they will be taxed more on the whole amount, and that's not true. When you get bumped to a higher tax bracket, only the amount of money you make above that bracket is taxed at a higher rate. The money you earned in the lower bracket is never taxed more.
3. Not Reporting All of their Income
You may not receive a 1099 income reporting form for any amount that is under $600. That is because a company isn't required to send out a 1099 for amounts under $600. But that doesn't mean that you don't have to report it. All amounts are required to be reported by law; it's just that you won't get a 1099. So you still need to book all of your income. That also means you need to be very careful about tracking it.
Your local tax service can usually help you in sorting out your taxes in a matter of a couple of hours. It's always best to get the advice of a professional, especially when you have an atypical tax situation.