There are more than 50 million freelancers working in America today in just about every field imaginable according to Upwork and Freelancers Union. If you’re earning taxable income as a freelancer, it doesn’t matter to the IRS if you’re a writer, artist, website designer, tutor or something else. You still have to do your taxes.
According to the IRS, every self-employed person who earns $400 or more must file an income tax return. But filing your taxes can get complicated when you work for yourself. It helps to have the right paperwork. Here are six documents freelancers need to file their taxes.
1. Form 1099-MISC
Form 1099-MISC, more commonly known as a 1099, is the most important tax document for most freelancers. Any client who pays you $600 or more in a calendar year must send you a 1099 declaring your income by Jan. 31.
This is the easiest way for many freelancers to quickly tally their annual income for their tax returns. You typically don’t have to attach your 1099 forms when you file, but it’s a good idea to save them for future reference in case the IRS calls.
Remember, you still need to report income received from clients that paid you less than $600, as the IRS deems this taxable income. You won’t receive a 1099 from these clients, so make sure you’re tracking all income throughout the year.
2. Financial Statements
It’s important to keep track of your freelancing income and expenses so you know how much money you made (or lost) freelancing. If you use bookkeeping software to track of your financials, doing taxes should be straightforward.
Failing that, you’ll need to use your financial statements, such as credit card bills or bank statements, to tally up your business expenses. This is why it’s a good idea to maintain a separate bank account or credit card for your freelance business.
Common business expenses that can be fully or partially deducted from your income include:
- Domain and website hosting costs
- Office supplies
- Advertising costs
- Business meals
- Software and app subscriptions
3. Receipts for Business Expenses
Receipts are also helpful when it comes to tracking business expenses. They detail the date and time of the transaction, the vendor, the item and the cost. Freelancers should save receipts in case of an audit or if the IRS needs to verify an expense. Receipt tracking apps can make this process easier.
4. Home office documentation
If you perform your freelance work at home, you may be able to deduct a portion of your living expenses, including your mortgage or rent payments. To qualify for this deduction, you must regularly use a portion of your home exclusively for doing business — no home office/rumpus room hybrids — and your home must be your primary business location.
You can deduct a percentage of your rent or mortgage payments based on how much of your home you use as a home office. The IRS also offers a simplified option using the square footage of your home office. Documents that show how much you paid in rent or mortgage for the year will come in handy when calculating your deduction.
You may also be able to deduct a portion of your home expenses related to your home office, including utilities such as phone and internet, homeowners insurance and improvements you make to your workspace. Make sure to track home expenses that benefit your freelance work.
5. Mileage log
If you use your car for your business — for instance, to get to clients’ homes or offices — you can deduct car expenses and even mileage. Keep track of your vehicle costs and business mileage throughout the year. These costs must be separate from personal use of your vehicle. Check out the IRS table of mileage rates for help calculating your mileage deduction.
Learn more about how mileage reimbursement works.
6. Form 1040-ES
Form 1040-ES is used to calculate and pay your estimated taxes throughout the year on a quarterly basis. This will help you keep up with your income taxes, reduce the tax liability you have at tax time and avoid penalties. It’s a good idea for freelancers to pay their estimated taxes throughout the year.
Image: Vladimir Vladimirov