In the past few years, self-employment, or working as a freelancer, has become a popular means to earn a living while pursuing creative ideas or working on passion projects. However, along with the many benefits of being your own boss, such as scheduling and completing work at your convenience, there are tax repercussions of which you need to be aware. For self-employment tax reporting, there’s some specific information and documentation you must have on hand when tax time rolls around. If you’re self-employed, here’s what to expect when you file your taxes.
Remember, No Job is Finished Until the Paperwork is Done
One of the most useful habits to foster as a self-employed taxpayer is keeping organized records for all transactions that pertain to your business. As you gain experience, you'll identify what record-keeping methods work best for you, but a good basic system should include the following:
Keep all receipts, and make brief notes on each describing how the expense benefited your business. This will make it easier when it comes time to sort them into the various categories which are used to report deductible expenses.
Track any sales or proceeds for services, whether by hand-written or electronic records. This can be crucial for correctly calculating the taxes owed each year. Many online services, such as PayPal, Square, and Venmo incorporate features that make it easy to download a list of transactions for any given period.
Download or scan digital copies of company bank statements, as well as lease or loan statements for any vehicles used for commuting or business trips.
If part of your home is designated as an office for your business, you may need documents for utilities, mortgage interest, insurance and other business-related home office expenses.
1099s Instead of W-2s
As an employee of a company, individuals generally expect to receive a W-2 after the end of each year. A copy of these W-2s is sent to Federal and appropriate state and local tax agencies. In addition, if you provide a service, such as consulting, professional services, or trade services, companies must issue a 1099 Form by January 31 of the following year. This 1099 reports the amount paid for services to the IRS, and is required to be sent to the self-employed service provider in any case when the payments total $600 or more.
1099 Forms are important to keep so they can be used to reconcile the amounts recorded for income on your tax reporting. However, each 1099 should be reviewed for accuracy as they are only used to report income for services, and not for goods sold.
When you switch to self-employment, the federal government still requires payment of the employer portion of taxes and your individual taxes owed. This "employer's" portion of the tax is also known as the self-employment tax. In general, the self-employment tax can be included in tax deduction calculations, but you need to be aware of this added cost of self-employment.
Tax reporting for self-employment can seem a daunting prospect, but with an experienced accounting team and a practical year-round financial plan, you can maximize the benefits and minimize the anticipated stress. Myrick CPA has experienced specialists to assist with record-keeping and ensuring your tax filings are timely and accurate. Contact Myrick CPA to schedule an appointment to assess your self-employment needs and prepare a 2023 tax plan.