There’s nothing worse than mailing everything to your tax person, accountant, or the IRS, only to find that you’re missing something. The hardest part about filing self-employment taxes is staying organized, but you can avoid a lot of drama by setting up the following filing formula.
1. Assemble Your Tax Documents
Most freelancers, sole proprietors, or single-member LLCs will need to fill out the 1099-NEC, but you may need Form 1099-K (for processing $600 more in credit cards) and Form K-1 (S Corps).
If you have employee income, then throw in the W-2, as well. Other common tax forms include Form 1095-A for health care taxes, Form 1098-E for student loan interest, and Form 1098 for mortgage interest. Consider using 1099-MISC if you have other means of income.
2. Keep Everything in a Safe Place
If you do your bookkeeping manually, review all of your paper documents before putting them in a folder, along with your deductions. If you’re doing your bookkeeping online (much easier), then make a folder on your laptop labeled “20XX Tax Documents.” Save everything in that folder.
3. Do Your Bookkeeping As You Go
A common freelancer tax mistake is waiting until the last minute to calculate their taxes. If you use a 1099 tax calculator and record your business transactions as you go, you won’t need to look through your accounts at the end of the year. When bookkeeping, be sure to:
- Record and categorize your business transactions. Make sure all of your business income and expenses are accounted for. If you’re behind, catch up in January or as soon as possible. This will give you enough time to double-check your numbers.
- Record what you paid to your personal account. If you don’t have a business account, now’s the time to start. For the time being, go through your personal account and check for discrepancies, tax deductions, and anything else you need.
- Reconcile all of your accounts. Each month, look at the transactions on your statements and your bookkeeping program or ledger. If both match, you’re good. If they don’t, you’re either overreporting or underreporting your income.
At the end of the tax year, make sure to do a broad review. Run a Profit and Loss report to make sure everything makes sense. Then, scroll through each category to ensure the numbers match.
4. Don’t Forget About Deductions
There are over 15 deductions freelancers can take advantage of, but there are three expenses you should track as you go: business mileage (for your vehicle), home office expenses, and internet/cell phone deductions. Here’s how you’ll log them each month:
- Business Mileage: When you use your car for business purposes, you can deduct the standard mileage rate of 57.5 cents per mile. For each trip, track the date, starting and endpoint, the purpose of the drive, and total miles driven. Add this log to your taxes.
- Home Office Expenses: You can write a percentage off of your household expenses based on the square footage your home office takes up. For example, if your office takes up 21% of your house, you can write off 21% of your rent, utilities, insurance, and more.
- Home Internet and Cell Phone: If you use 50% of your cell phone or internet strictly for your business, you can write off that 50% of your monthly bills at tax time.
Tracking the above deductions will make filing your taxes easier at the end of the year.
5. Prepare Your Taxes For The Accountant
Every tax person is different, but you typically need to send copies of any tax documents you receive, a Profit and Loss Standard report, and your total deductible portion for your tax deductions. Check with your accountant before sending anything their way.