The IRS closely monitors anyone who might underreport their income. This includes everyone from tech billionaires with complex tax schemes to self-employed individuals who might not track their earnings accurately. Even if you’re not a billionaire, being self-employed means facing more complicated tax issues.
Freelancers and the self-employed must always report income accurately. With the IRS now scrutinizing more closely, precision is vital. Here are some tips to help self-employed individuals track their income and comply with IRS regulations.
Keep Your Self-Employment Income Separate with a Business Bank Account
If you haven’t yet, now is the perfect time to set up a separate bank account for your business. Even if you operate under your own name, having a dedicated account simplifies tax reporting and expense tracking.
Whether you choose your regular bank or another institution, this separation aids in income tracking. You can also use the bank’s online tools to summarize your income and compare it to what the IRS has received.
Consider Using Accounting Software
For freelancers and the self-employed, tracking income and expenses can be daunting. Small business accounting software simplifies this task. Products like QuickBooks are designed for small business owners and can make accurate income reporting much easier.
If your self-employment income is substantial, the cost of accounting software is justified. Even if you’re just starting, it’s worth exploring what these packages offer.
Or Go Old School with a Spreadsheet
If you need extra help with your small business finances, a subscription-based software package might be the solution. Otherwise, you can save money using a traditional spreadsheet.
Whether you pay for Microsoft Office or use a free alternative, a spreadsheet can track your self-employment income, listing each payment individually and providing a total. You can also track expenses on the same spreadsheet, making tax filing easier and saving you money.
Make Quarterly Payments Based on Year-to-Date Earnings and Past Experience
Tracking your self-employment income carefully is crucial for several reasons, not just for filing your tax return. As a self-employed individual, you must make quarterly payments to the IRS and use your final return to settle up.
Making those estimated quarterly payments is important whether you owe more or are due a refund. Missing them can lead to interest charges, penalties, and a higher chance of an audit.
Knowing your year-to-date earnings helps estimate your tax payments. If you use an accountant, share your YTD numbers with them; if not, you can do the calculations yourself.
Watch Out for Form 1099-K
As the new year begins, the payment processors who serve the freelance community and the self-employed will be working overtime, cranking out millions more 1099-K forms. These forms are designed to summarize and report income from all kinds of self-employment activities, and if you earn at least $600 in 2022 you will be receiving one.
If you have been tracking your self-employment income carefully, the numbers reported on the 1099-K form should come as no surprise. If your tracking has been less than diligent, you may have to make a few adjustments before completing your taxes for the previous 12 months.
Seek Out Ways to Lower Your Tax Bill
Being self-employed can be costly, and as client payments grow, so does your tax bill. Fortunately, self-employed individuals have access to excellent tax-saving opportunities. The sooner you find them, the easier they are to use.
If self-employment is your full-time job, consider opening an individual 401(k). It works like an employer’s 401(k) but has more generous contribution limits. You’ll need an employer identification number (EIN), which you can easily get on the IRS website.
Other tax-saving options include contributing to a health savings account (HSA), opening a SEP-IRA, and deducting business expenses like office supplies and internet access. Use your tracking tools to monitor these adjustments, reducing your final tax bill and easing the cost of self-employment.
More workers are leaving traditional jobs for freelancing and gig work, but being self-employed is becoming pricier. New reporting requirements mean the IRS will receive every dollar you earn. Ensuring these figures match your tax return is crucial and has significant implications for your business.
The tips above help ensure accurate reporting, so you can avoid IRS issues and focus on your clients. Whether you earn a six-figure income or just some extra cash, these tips make self-employment easier.