Filing taxes is a little bit trickier for freelancers and entrepreneurs than it is for everyone else. For the traditional employee, a lot of the groundwork (like calculating deductions) is already done. But for the self-employed, tracking your taxes and business expenses is a constant necessity.
If you fall into this group, the first thing you’ll need to get a handle on when it comes to paying your taxes is the Form 1099. You need to file a 1099 for every entity from which you received money in the prior tax year. This includes everybody from your clients to your bank that paid you interest. There are many types of Form 1099s, this link has a good breakdown of each).
Companies are required to issue a 1099 if they paid you at least $600. They are also responsible for sending you a copy and making them available online, though it never hurts to send a reminder.
The other most important tax concept for freelancers and entrepreneurs is to track expenses year-round. One of the benefits of doing this is it allows you to take advantage of a unique ability afforded to the self-employed: making quarterly tax payments throughout the year. Filing quarterly taxes not only makes the tax process manageable, but it encourages you to actively keep track of your finances.
To assist with this, there are multiple online tools that can help with your bookkeeping. AARP Foundation Self-Saver is an AARP Foundation tool for older professionals that can be used to help with calculation, withholding, and submitting quarterly taxes. This tool (made specifically for the self-employed) provides a tax calculator, automated withholdings on 1099 income, expense itemization, and quarterly filings to the IRS.
One of the saving graces during tax time for freelancers and entrepreneurs are deductions. Deductions work as write-offs that you can use to reduce your taxable income and in turn, reduce your tax bill. Examples of deductible expenses would be a work computer, business travel expenses, vehicle use for business trips, or any expense related to the growth of your business or day-to-day necessities.
Keeping digital records of your expenses will also help you in the off chance you get audited by the IRS. Though the odds of a tax audit are low, the IRS may look into your filings more closely if you claim large net losses or don’t declare income on a 1099 form. On the off chance, you do get audited, having your expenses and income organized will help you get through the process.
Navigating taxes as a freelancer or entrepreneur can be stressful. But by breaking down your to-do list and keeping track of your finances, tax season can turn from a dreaded time-consuming process into a more manageable and financially empowering time of year.
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