Though self-employment could potentially earn a lot of money, having your taxes in order is very important, according to an article on About.com, a website owned by the New York Times Co.
Some forms to start out with include:
- Schedule A — Reports personal expenses to the IRS like medical, interest, and gifts to charity.
- Schedule C — Reports business income/expenses to the IRS.
- 1099 — Each year, clients report the money spent on individual contractors to the IRS. A copy of this form is also given to contractors to declare business income in their schedule C.
- 1040 — The general tax form used by everyone. Expenses declared on this form could change for freelancers depending on whether they post a profit or a loss for the year.
The IRS automatically detects when the income reported on the Schedule C is less than what shows up on your 1099 forms, said William Perez, a tax professional who contributes to About.com.
Fortunately, self-employed individuals can deduct expenses from their taxes, though they should take care not to abuse it. Use spreadsheets to track the date and time, who was paid, category and the cost of all your expenses. Try sticking to the expense categories found in the Schedule C form, though other categories can be reported.
If you pay for your own health insurance, you can deduct your premiums on the 1040 form. If your business doesn’t make a profit, you should deduct health insurance premiums using Schedule A instead of filling in line 31 of the 1040 form.
Though deductions can be made, freelancers should be careful. If your business posts a loss more than two out of every five years, it could be considered a hobby, which could trigger an audit.
Other tips for filing taxes as a self-employer include deducting business assets, your home office and choosing between depreciation or Section 109.