One of my file cabinets
By now you should’ve gotten all of your W-2s and 1099s, and you’re preparing for tax season before the deadline date of April 15, 2010. For some people, it’s a time to roll in the dough and get some much needed dinero. You’re dancing around your home like you’re Swizz Beatz and saying, “Somebody bring me back some money please,” but don’t let Uncle Sam switch up the chorus on you. For others, like me who usually end up with an underpayment and have to pay the state, tax season can be a frustrating time. Even worse, I completed my taxes this weekend and owe the Feds and the state.
Here is the downside of being a freelance writer and an independent contractor. Although you do get more money up front for projects and are paid in full, you are held responsible for paying your own taxes. This could end up being pretty expensive come January for any contracted job that pays you $600 or more. But with the right recordkeeping, you can make doing your taxes a little less painful.
Lesson One: Each company that has paid you $600 or more is required to send a 1099 form. However, you are responsible for disclosing payments of all jobs that you’ve completed in any given year as an independent contractor. You will have to fill out the Schedule C (Form 1040) entitled, “Profit or Loss from Business.” This form asks you to calculate your gross receipts or sales, business expenses, home office expenses, travel expenses and any repairs and maintenance. This form is imperative to show how much you made versus how much you spent. If your total is negative and you spent more than you made, you must disclose this information to show that your investment is not at risk. If it is a risky investment, you may end up paying all that money back if you’re not honest about it. (I had a previous co-worker who was an author, and he’d charge everything he did as a business expense even if it was for personal reasons. Ten years later, he’s still paying off his back debt.)
Lesson Two: Keep a file cabinet to house all of your folders and binders for the previous year’s self-employment expenses. You do not want to wait until the last minute to have to dig information out about your home business.
Lesson Three: Keep all of your receipts. If you claim computer repairs and maintenance because you do most of your business via computer, you will have to prove this. If you bought an ink cartridge, replaced a camera battery, bought printer paper or had to buy gas to go out “in the field” to cover an assignment, you can calculate that as an expense, but you have to be able to prove it was for business. This includes keeping track of how many miles you’ve traveled or how much you use items for business use versus personal use. Include household bills that you use for your home business, such as your Internet or phone bill for communication and reporting. Make a copy of your bills, one for your checking account (or however you paid for the repairs) and one for your taxes. Each time you purchase something for your home business, make a copy of the receipts and put them all in your business folder for that year.
Lesson Four: Become best friends with Excel. Every time you purchase something for your business, you should add this information to an Excel spreadsheet, and use formulas to calculate your expenses and profits. By the time you get to the Schedule C form at the end of the previous year, you’ll already know what that form will look like.
Lesson Five: If you did not make a profit from your business, subtract the profit from the expenses. The negative calculation you come up with can be deducted from your U.S. Individual Income Tax Return on line 8a, Taxable Interest. I made the mistake of adding it instead of subtracting it the one year that I didn’t make a profit, and it took a lot of paperwork and phone calls to get that situation worked out. (That year, I got a refund. Lucky me.)
Lesson Six: Be prepared to prove your expenses for the next three years. The IRS has three years to audit you for each year. Keep the receipts and folders in order so you can immediately prove where you got your calculations for your self-employment tax form. Consider paper clipping different receipts for their purpose (ex. supplies, repairs, travel expenses, bills).
Lesson Seven: For those of you who are collecting unemployment checks for being laid off, justifiably quitting or working part time, if you’re lying about how much you’re making per week, be prepared to pay up. The state is going to get the money from you sooner or later. May as well be honest from the beginning because if your 1099s show differently you’ll end up shelling out some cash. It is highly recommended to let the state take out state and federal taxes from the very beginning because on your tax form, you will have to tell how much you made in unemployment. If the amount is too high once your self-employment calculations, unemployment calculations and previous job’s calculations are added up, there goes your potential refund.
And even with all of this information for your business, keep in mind that it still may not average out to paying enough in taxes. You may get a refund. You may end up owing. For me, it’s 50/50. But one thing I will say is I’ve avoided owing more by keeping a detailed, honest and organized business track record.