Making the transition from conventional employment, a regular job to freelance work, whether as a writer, graphic artist or computer program, has several challenges, not the least of which is coping with new accounting and bookkeeping duties.
Rather than getting taxes removed from your paycheck as a traditional employee, you must now judge your individual tax payments each quarter as a self-employed individual.
Additionally, freelancers must keep detailed and accurate books if they expect to manage their businesses successfully and prevent fraud and other issues as they grow.
Because of this, it’s imperative to have a basic comprehension of the specific accounting requirements.
Important Financial Records
Great preparation starts with keeping an eye on a range of essential financial records and forms. Here are a couple of documents you can expect to encounter in the process of handling your freelance taxes and accounting.
Federal Form W-9
The W-9 form is a formal request for taxpayer identification number and tax certificates. As a freelancer, you will probably have to send a copy to each customer and seller with whom you contract, so make sure to keep them handy. It’s comparable to a W-4 form, but it signifies that a separate organization employs you, and thus won’t have any taxes withheld.
Schedule C (Form 1040)
Another critical form for the self-employed, Schedule C is used to report losses and profits from a company when you pay annual taxes. It is also where you may list any business-related deductions. Freelancers will need to calculate the cost of goods, gross profits, and expenses to fill out this form correctly.
Schedule SE (Form 1040)
Schedule SE will help you determine your self-employment tax. This tax includes your federal income tax amount in addition to contributions to Social Security and Medicare. Schedule SE is registered yearly with your regular tax return.
If you anticipate doing enough business to generate over $1,000 in taxes, you’ll be responsible for paying annual income taxation. Form 1040-ES will help you gauge your quarterly tax burden during the year with the enclosed directions. You may complete each payment voucher to trade in or pay your invoice online.
The 1099 IRS form is the document that your customers will use to report how much money they paid for your services during the last tax year. Think of this document as the W-2 IRS equivalent form for freelancers. There are different types of 1099 forms for various types of payments, but only two are relevant for most freelancers:
Customers are responsible for sending a Form 1099-MISC to self-employed men and women whom they pay $600 or more in one year. The individual or business that pays a freelancer must file a 1099 tax form with the IRS and send them a copy.
This form is for people who have approved credit card payments using your business credit card. You should only get a Form 1099-K in the event you’ve made 200 or more transactions, and the amount spent at one vendor exceeds $20,000.
5 Most Important Accounting Practices for Freelancers
As a freelancer, you might not have the financial resources to hire an accounting staff to help you through the year. Nonetheless, it’s significant that self-employed people follow the best practices for accounting and accounting. Here are a few ideas for keeping your finances in order.
- Track Income
To handle your company successfully and meet all tax obligations, you’ll have to monitor any income you get with precision and attention. Even if a customer didn’t send you a Form 1099, you must still report the income received from this sale to the IRS.
- Track Expenses
Just as it is essential to monitor income, freelancers must list all business-related expenses. Along with obligations to suppliers and employees (if any), self-employed persons can often write off costs associated with business advertising, office space and supplies, mileage, health insurance and travel. Make sure to keep detailed receipts of purchases so that you can back up each exemption you claim on your tax return.
- Calculate Net Income
Once you’ve calculated the worth of income and expenditures, you can determine net income together with the following formula:
Net Income = Revenue — Expenses
Revenue identifies all inflows and other kinds of sales, while costs include all costs associated with creating said earnings. Calculating net income is among the first steps to finding your cost of goods sold and contribution margin, which assesses how a specific item or group of items is helping or hurting your bottom line.
- Follow Up on Invoices
Because self-employed persons do not receive regular salaries nor paychecks, it is vital that they take action to secure adequate cash flow. Together with sending your customers invoices that appear professional and arrive on time, make sure you follow up on any overdue invoices. Doing this helps to make sure your livelihood and your business continue to survive and thrive. Additionally, it’s sensible to keep hard copies of paid invoices because you may you experience computer problems down the road.
- Invest in Accounting Software
Since you are not an accountant, you especially need the best accounting system possible to help keep your books in order. It allows to prepare quarterly estimated payments, monitor expenses, and deductions, and also complete Schedule C and other vital forms.
From the IRS’ view, just because you are not an accountant is no excuse for making mistakes on your tax return. If you can not afford an accountant, a fantastic software program can help keep your freelance business organized and keep cash flowing.
Forms and Publications for Freelancers and the Self-Employed
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- Think Carefully – When Picking a Business Accounting SoftwareChoose Business Accounting Software Carefully Choosing an accounting software package is not a simple matter…