We’re all living in the gig economy, which has its advantages and disadvantages. It’s easier than ever to start a reliable stream of income to complement your bi-monthly paycheck. Maybe you already dove headfirst into your sole proprietorship.
Regardless, the IRS wants to know certain details about your freelance income. It mainly wants to know who paid you—and how much. Unlike a W-2 job, there is no one else to keep track of these important records. Below are five pieces of advice to make tax filing season easier on you and your enterprise.
- Cordon off freelance income and assets. If you want your freelance work to be profitable, it’s incredibly important to know how much revenue it generates. You should create a bank account solely dedicated to your sole proprietorship. This can let you easily see time stamps of deposits and what it takes to keep everything afloat. It will also help you budget for exciting projects you’re pondering for the future.
- Keep records of disbursements from clients. All you care about is that your client paid up, right? While that’s important, you need a clear system to track the dates of invoices and transactions. Many online financial accounts offer robust record keeping features, but you shouldn’t leave anything to chance. Payments are far from the only thing to keep track of when it comes to your clients, but this is a great starting point.
- Don’t rely on your clients to send you a 1099 form. Remember when we said you can’t rely on your clients for everything? Even if we’ve already mentioned it 10 times, it bears repeating. For each client who pays you at least $600 in a year, you need a 1099 form. Keep track of every client who owes you a 1099 form so you know who to contact as April 15 approaches. You can’t do your own taxes without 1099 forms.
- Save every receipt. As long as you don’t incorporate your business (as an LLC or corporation, for example), you will likely report your freelance income on your personal tax return. A number of business expenses may be deducted from your taxable income; the home office deduction is a popular one among freelancers. Everything you buy for your business, from business funds should be documented. The IRS expects you to have documentation to support any deductions you claim.
- Purchase an inexpensive accounting system. Several cloud-based accounting services are great for freelancers needing to automate certain tasks. Not having to go to several different places to find invoices, payment records, hours worked, and other important information will save you at tax time. Automating things will also free you up to take on new ventures.
In Trouble With the IRS?
Doing the work of a freelancer while keeping track of your finances is not easy. Unfortunately, the IRS is not interested in the reasons for unreported income or other tax discrepancies. Our firm helps individuals and small business owners resolve stressful tax issues with the IRS so our clients’ futures are brighter than their pasts. How can we help you?
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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