As a freelancer, you have the responsibility of keeping track of your income and expenses. Unfortunately, accounting for freelancers can be daunting at first. But, if you follow a few simple strategies, you’ll learn what to do quickly. And, before you know it, you’ll have a nice routine set up that will make it easy to track profits and losses.
1. Know about W9 and 1099 forms
First, it’s important to be aware of what a W9 form is, as well as what a 1099 form is:
A W9 is what you’ll fill out for a client before doing work for them. It gives the client your Social Security number so they can create 1099 for taxes.
Because taxes aren’t withheld when you get paid as a freelancer, clients will send you 1099, rather than a W2, before it’s time to file your tax return. This form will show how much you earned during the tax year.
2. Track income, expenses, and net income
Tracking your income and expenses is important because you’ll need to report these on your tax return. To keep things simple, open a separate business bank account for all of your income from clients, as well as all of your business-related purchases. Doing this also allows you to track your net income throughout the year (just subtract your expenses from your earnings to see how much is left).
3. Know what to expense
By keeping track of your expenses, you’ll be able to claim them on your tax return to help reduce the amount of money you owe. But the key is to know what you can and can’t claim as an expense. Basically, the IRS will allow you to deduct expenses that are considered ordinary and necessary for your business. For example, top tax write-offs for freelancers include the costs of running your home office, vehicle expenses related to your work, health insurance costs, and the cost of training.
4. Be ready for a possible audit
Beware that you might end up being audited. This can be stressful, but if you work diligently to keep your business income and expenses separate from your personal accounts, and if you keep copies of all of your receipts and paychecks, you’ll be able to move through an audit with greater ease.
5. Tidy up your accounting regularly
It can be easy to fall off course when it comes to keeping track of your finances. So check in on a regular basis, such as weekly or monthly, to ensure you’re logging all of your earnings and costs correctly.
6. Set aside money to pay taxes
Remember, as a freelancer, taxes won’t be withheld, so you’ll need to estimate how much you’ll owe based on how much you earn. Rather than getting hit with a huge tax bill at the end of the year, set aside some money each month so you’ll have it ready when you need to pay your quarterly estimated taxes.
7. Use software to make it easy to send reports to your CPA
Using accounting software is a great way to keep all of your information in one place. And when your CPA needs information to do things like preparing your tax return, it’ll be simple to send reports without having to do it all manually.
Lunafi Can Help!
If you need support when it comes to accounting, or you just want to make it as easy on yourself as possible, the Lunafi app can help you see your income and expenses, as well as your taxes owed and saved, in real-time. Give it a try today!