Too many freelancers don't know what they bring in or only have a vague idea. Here's how to know your income.
How can you organize your papers so you don't leave any income out when you do your taxes? The most systematic way is to take a copy of last year's taxes or the organizer your tax preparer sends you and match item by item. Then if you discover you have not received a 1099 from a bank or other income source for last year, you will be reminded that you should call to ask about it, if it has not come by the end of January.
Just because you have not gotten a 1099 for something does not mean that the IRS did not. You are supposed to declare all the money you received, whether or not you received a 1099 for it. (The person who contracted you for the freelance job does not have to send you a 1099 if the amount was under $600.) People file their 1099s late; you may not receive a 1099 by the time you file your taxes. That doesn¹t mean that the IRS won¹t receive the 1099 sooner or later and match it to you.
Keep track of every payment every person sent you during the year. Then match those amounts to the 1099s you received to make sure the amounts are the same. If not, call the people who issued the 1099 in question and discuss the discrepancy; 1099s can be changed. If you have a record of payments, figuring out your income for tax purposes becomes comparatively easy.
The IRS is getting very good at matching W-2s and 1099s to income tax forms. Freelancers, however, sometimes mix W-2 items with freelance income on Schedule C or sole proprietorship form. Then when the IRS sends a correction saying you left out the W-2 income, you have to study the forms to figure out if the IRS is right. Remember: Wages that have taxes taken out must go on the wage line and have a corresponding W-2.
During the year it¹s good to put every tax document, be it a 1099 or W-2, into one tax file as well as plan ahead by filing every stub or record of money received. That way, the odd payment won¹t elude you.
Don't overlook unusual events that have tax consequences like:
- Unemployment payments
- Pension distributions
- State tax refunds
- Marriages or divorces
- Disability or sickness benefits
- Property or stock sales
- Starting a business
- Moving your business and/or your residence