Keep Track of Who You’re Paying And Who Pays You
As a freelancer, you may not think of yourself as a business, but technically, you are. Even if you are using your personal bank account and haven’t filed for a business license in your respective city, the IRS considers you a business if you received over $600 in funds from someone in trade for services. If a client asks you for a w9 (which they should), they will be reporting all of the payments they make to you to the IRS. Like a w2, you will receive a 1099 from them within the first quarter of the year (hopefully) that outlines how much they’ve paid you during a particular tax year. This is why it’s really important to make sure that you keep track of how much a company has paid you. The IRS has record of this income, and if you file less income than what companies have reported, you will be notified and will be required to pay the difference in tax liability, plus applicable fees and interest if they apply.
Conversely, if you subcontract other people to do work with you on projects, and pay them more than $600, you need to keep track of this and report it as well, and issue them a 1099 in a timely fashion. This is also important because you can write these payments off, which again, lowers your tax liabilities. Again, make sure that you have exact records of what you are paying people. You don’t want to report more than what you paid someone to lower your tax liabilities because this could lead to all sorts of issues down the road. Keep your reporting as clean as possible to avoid being audited or being involved in IRS related disputes.
Pro-tip: get an EIN (Employer Identification Number) or TIN (Tax ID Number) so that you aren’t giving your clients your social security number. The EIN and TIN are the same 9 digit number, so don’t get confused by the names (I kind of was at first). Obtaining an EIN/TIN is quick and easy. It is attached to your social security number, so be mindful that your tax liabilities are very much still your responsibility, even though your income is being reported to a different number.
Utilize Accounting Software to Keep Your Records Straight
If you’ve already started freelancing and being paid for work, you may have noticed that your clients require you to invoice them before you are paid. An invoice is like a receipt. It is an itemized report of what they paid for that they retain for their records. You may be noticing a trend here, but you need to keep the same records for the people that you are paying for work. At the end of the year, you need a total of all of those invoices for each client for money received (don’t get this confused with how much money was deposited in your bank account, especially if you use services like Paypal or if you take payments via credit card as those typically deduct fees before you receive the funds in your account). Again, you need to have that same total for the amount that you’ve paid out for any vendor or subcontractor that you’ve paid out totalling more than $600.
So how do you keep all of this straight without having to dig through your inbox and add up invoices and what not? Oh yes, expenses and deductions too… throw that into the mix as well.
Accounting software. It will save your life. Again, you may not think of yourself as a business, but your requirements are the same as a business, so you might as well fall in line and use the tools that are out there to make your life easier. This will enable you to spend more time providing services and growing your business, and less time dealing with and tracking this stuff so that you can stay out of trouble with Uncle Sam. Sure, you can use an Excel spreadsheet to track everything. You can even create some fancy invoices using your favorite everyday word processing software. But, there are a plethora of services that you can use to take care of all of this for you so that you can handle the financial part of your business quickly and painlessly. Here’s a free one that I’ve used and highly recommend: Wave. It’s free, you can send out professional branded invoices, and keep track of expenses. You can even be paid through the app, and it keeps track of the credit card and/or bank processing fees so that you can write those off. Clients love easy ways to pay their bills (and trust me, you will too). My favorite feature is that you can keep track of personal and business expenses separately. When I first started out, I didn’t have a separate bank account for my personal and business stuff, so separating everything was a nightmare. Freelance accounting takes some practice and getting used to. Using Wave can help you create some better habits. And, if you so decide, hire an accountant or bookkeeper to help you out.
Here’s to the Future
The more you plan now, the easier your future tax days will become. The better you get at saving and organizing your receipts and records, the less cumbersome it will be later on. As previously stated, consult with a professional. There are many requirements for businesses that you may not even realize, and it’s best to plan ahead versus being blindsided. Keep them in the loop with what you plan to do with your business, especially as it evolves. For example, at a certain income level, you will need to pay quarterly estimated taxes. Or, if you want to apply for health insurance as someone who is self-employed. Your accountant should be your best friend, so that they can help you keep more of your hard earned money!
The Lowdown on Filing Taxes for 2016: What You Need to Know