Unless you’re a freelance bookkeeper, the thought of keeping your records simple, clear, and clean probably makes you shudder. As an independent contractor, your goal is to maximize your time working for clients by minimizing the effort you put into admin duties. Independent contractor taxes come with the territory when you want the freedom to work on your own.
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How to Organize Your Taxes Effectively as a Freelancer
One way to pull away from the admin of independent contractor taxes, besides hiring an accountant, is by organizing your tax documents, deductions, and Profit and Loss statement month to month. Here’s how to do that.
1. Know What Forms You Need to File
The first step to getting organized is simple: figure out where all your tax documents go. If you prefer to receive or send your tax documents by mail, keep everything in a file folder. However, it’s better to file your taxes electronically, especially if you’re using bookkeeping software.
Most independent contractors will have to use the following tax documents:
- Form 1099-NEC: Replaced the 1099-MISC. Used by sole proprietors or solo LLCs.
- Form 1099-K: For businesses that processed over $600 from credit cards.
- Form K-1: If you run an S Corp, use K-1 to file your income taxes.
- Form W-2: For entrepreneurs that also have another job on the side.
- Form 1098: For mortgage interest. Only useful if you own your own home.
- Form 1098-E: For student loan interest. Some education is tax-deductible.
- Form 1095-A: For health care. Use this if you purchase your own insurance.
Once you know what documents you need, you can start to figure out your tax burden.
2. Calculate Your 1099 Taxes Ahead of Time
Freelancers should use a 1099 tax calculator to understand their monthly tax burden. While it’s good practice to keep 25-30% of your income for tax purposes, having a more accurate number will give you the chance to spend your money on other things, like scaling your business.
While you’re at it, you should calculate 3 of your deductions: business-based vehicle mileage, your internet and phone deductibles, and home office expenses. These deductions are the most time-consuming and difficult to track once you’re at the end of the tax year.
Make sure you track, save, and file deductions that have to do with:
- Social Security and Medicare Taxes
- Health Insurance Premiums
- Business Meals and Travel
- Business Loan/Credit Card Interest
- Publications and Subscriptions
- Education (Business Related)
- Business Insurance
- Advertising and Startup Costs
- Retirement Plan Contributions
By utilizing your deductions, you could lower your tax burden significantly.
3. Review Your Documents and Keep Them
Even though you’ve done your due diligence to prepare your independent contractor taxes for filing, you can’t just send them off when January rolls around. Whether you organize your records in a spreadsheet or a financial app, you need to reconcile your accounts to make sure they’re balanced.
The process of reconciling is easy; just make sure the transactions on your statements match the transactions on your program. If they don’t match, you may be underreporting or overreporting your expenses. Even if everything looks fine, it still pays to double-check.
After balancing your accounts, you have to send the following documents to your accountant:
- Copies of your tax documents (1099-NEC, 1099-K, etc.)
- A Profit and Loss report for your business
- Proof of your itemized deductions (vehicle mileage, home office, internet, and phone)
Don’t throw anything away once you send off everything to your tax person. Staying organized means keeping your self-employed records for at least three years after sending them to the IRS. In some cases, you may need to keep your tax records for six or seven years.
If you have quick access to your files, you’ll have peace of mind if or when you’re audited. You typically have a limited time to correct your file, so keep your records handy for the taxman, and make your life easier for the next review of your independent contractor taxes.
The post 3 Tips for Organizing Your Taxes Efficiently as an Independent Contractor: 1099 Forms and More appeared first on The Startup Magazine.
