The freelance lifestyle has numerous advantages — among them, freedom and flexibility. Even so, you can’t escape your tax obligation to Uncle Sam, and being a freelancer poses its own challenges at tax time. Consider these factors that might impact your income taxes: (See also: 8 Tax Return Mistakes Even Smart People Make)
1. Track All Forms 1099-MISC
Every client from whom you earn $600 or more in payments for services performed must file Form 1099-MISC, Miscellaneous Income with the IRS. Like employer-issued W-2s, every time that a client issues you a 1099-MISC, the IRS receives a notification. They’re essential in order to prove your income, so make sure to keep track of all of them. Generally, form 1099-MISC needs to be issued by January 31st. If you haven’t received your form by February 15, request a duplicate from your client for your own records.
2. Include Income From All Sources
While a client isn’t obligated to file a 1099-MISC when their total payments in the same year to you are under $600, you’re still responsible to report those payments as taxable income in your return. The IRS charges a 25% inaccuracy penalty on top of applicable taxes and interest for late payments, including income from all sources, even when not reported on a 1099-MISC.
(As a side note, we keep on specifically referring to a 1099-MISC by its full name because there are several types of 1099s, including 1099-DIV, 1099-G, 1099-H, and 1099-INT.)
3. Separate Individual and Business Finances
To help you track cash flows directly related to your business, open a separate business bank account and credit card. (See also: The 5 Best Credit Cards for Small Businesses)
The monthly statements of those business bank accounts and credit cards will allow you to reconcile your monthly income statement and will be very handy in case of an IRS audit. When shopping around for a business checking account, consider one that keeps copies of used checks. The reason is that bank statements and canceled checks are acceptable documents in case you receive a Form 4564, Information Document Request from the IRS.
4. Hire an Accountant if Using Schedule C
Schedule C from Form 1040 is one the most useful tax forms for freelancers and side giggers because it allows them to deduct all applicable business expenses, ranging from cost of promotion in local media to use of home space for business purposes. (See also: 101 Tax Deductions for Bloggers and Freelancers)
However, individuals using Schedule C often make mistakes on this form. Whether those errors are intentional or unintentional, the IRS has noticed the higher number of mistakes and has set the policy of auditing individuals using Schedule C three times more often than it does corporations. Hire an accountant to file your taxes and…