When you work for a company and receive a W2 for the money you’ve made throughout the year, tax time tends to be a bit easier than if you’re a freelancer. Self-employed freelancers have to keep more detailed records of their income and business expenses to correctly file and avoid an audit from the IRS. Here are a few different ways that you can keep track of your taxes.
When you are an independent contractor and make more than $600 that year for any individual client, you will be asked to fill out a W-9 and receive a 1099 form at the beginning of the following year. You will need to gather your 1099s for all of your clients.
But 1099s are not always enough. Even if you don’t receive a 1099, you are still supposed to report any income you’ve earned. Plus, sometimes the company won’t have calculated your income for that year correctly, so you can fix any errors that you find when comparing the 1099 to your own records.
When you go to fill out your taxes, you’ll need a few different pieces of information. Most importantly are your income and business expenses, but you may have a few other deductions, such as medical, charity contributions and so on. You will fill out this information on your 1040 tax form. You’ll also need to fill out a Schedule C to calculate the Social Security and Medicare taxes that you should have been paying throughout that year.
How to Keep Track of Your Taxes
You have a few different options for keeping track of your taxes, one of which is a dedicated program such as TurboTax. You’ll simply enter the information either as you go along, which is much easier, or in one lump at the beginning of the next year during tax season. The program you use will also provide all of the fields you’ll need to fill in for various deductions as well. For some, this is a lot easier. But not everyone wants to shell out the money for a program or simply do not want to use one.
If this is the case, one of the easiest and most organized ways to keep track of your tax information is to use a spreadsheet. You can set up a few different pages: one for income from all months or one spreadsheet for each month individually, and pages for each type of deduction.
For your income page or pages, you have a few different pieces of information you can keep track of. These include the date you received payment, the client who paid you, the amount they paid you, the number of the invoice that is connected to the payment and the amount of PayPal fees, bank fees or other processing fees you might have incurred. The fees will be regarded as an expense, but it may be easier to keep track of them with your income as you go along.
On another or other pages, you can keep track of your business expenses. These include things like rent on a home office, expenses for a business vehicle, supplies, meals with clients and others. They can also include medical expenses, such as health insurance, prescriptions and doctor visits. All of these deductions will help you tamper just how much you’ll owe, but you need to be careful and truthful and not bloat these expenses, or you risk being audited.
If you are a self-employed freelancer, make sure that you keep track of your business income and expenses very accurately to properly fill out your taxes for the prior year. It will be even easier if you keep track of everything as you go along so you don’t have everything to calculate at the end of the year. Whatever you do, always remain truthful about your income and expenses to avoid an audit, which can be a huge hassle should you ever face one.