Working from home can be a dream come true, especially if you also work for yourself. Opportunities for freelancers, gig workers and other self-employed men and women have exploded in recent years, giving people the freedom they long for without sacrificing the income they need. This is far more evident with the current COVID situation where millions of Americans are now commuting from their bedroom to the living room for a Zoom call.
That freedom and flexibility can be exhilarating, but there is an unwelcome aftereffect as well. Tax issues can make working from home less attractive, and more expensive, leaving many gig workers, new freelancers, and small business owners frustrated and discouraged. But if you plan carefully and know what to do, you can reduce the tax headache and enjoy the perks of working from home. Here are some important things to know before the tax man comes calling.
Before we jump into tax strategies, it’s essential to note that the IRS is increasing enforcement in the coming months and even years after this pandemic. More small businesses and independent contractors are going to find themselves getting contacted by the IRS requesting more information or stating they owe money to the IRS. If you have any tax trouble or owe more than $10k to the IRS or state but can’t pay in full, contact our firm today. We help people find tax relief www.mytaxcoaching.com/relief.
So, lets get into some best practices for keeping your tax records clean in case the IRS comes knocking on your door.
Gather Contact Information from Your Clients
Whether you are preparing marketing letters for local businesses, designing websites for new startups or putting together dozens of individual side hustles, it is important to have contact information for each and every client.
The typical freelancer may have dozens of clients in a single year, and being able to get a hold of them is an essential part of doing business. So go through your email lists, sort out your invoices and create a database of addresses, telephone numbers and emails. Hopefully you will receive all your documents on time, but if not, that contact information will help you track down the missing paperwork.
Store Electronic and Paper Copies
The old saying that it is better to have it and not need it than need it and not have it is doubly true when you are your own boss. For gig workers, freelancers and other self-employed individuals, the loss of a single tax form could delay filing for months and even trigger an audit by the IRS.
That is why it is so imperative to build redundancy into your document storage. That means scanning each 1099 form as it is received, storing it on your hard drive, cloud account and offline storage device. It also means making paper copies of those important documents and storing them in a safe place. These tax forms will be critical when the tax filing deadline rolls around, so make sure you have them when you need them.
Keep Your Own Ledger
In a perfect world, every freelancer and at-home worker would receive all the tax forms they need, but that perfect world is the exception and not the rule. If you want to be ready for tax time and avoid undesired entanglements with the IRS, you need to keep your own ledger.
Having your own records to back up your earnings estimates will help you in many ways, from qualifying for lower cost health insurance to getting a head start on your tax return. It may be a little more work, but keeping your own ledger will be beneficial in the long run.
Check Off Each Form As It Comes In
Now that you have your ledger in hand (or on your computer), you can cross reference your records and check off each 1099 form as it is received. When you have crossed the last form off your list, you can start filing your taxes and get the refund you are owed.
Be sure to scan each form as it comes to you and make several backup copies. Having this documentation accessible will make your life easier should the IRS question part of your return or request additional information about the income you are claiming.
Minimize Your Tax Liability with a Solo 401(k) or SEP-IRA
Many inexperienced freelancers and gig workers are surprised at the high taxes they are required to pay, and the self-employment tax can be a particularly devastating blow. This extra tax is assessed to self-employed individuals, and it can have a big impact on members of the gig economy.
You may not be able to get rid of the self-employment tax, but there are steps you can take to keep your tax liability to a minimum. Retirement plans for the self-employed are among the most generous around, and opening a solo 401(k) or SEP-IRA could allow you to shelter tens of thousands of dollars in income.
These self-employed retirement plans do need some setup and a fair amount of paperwork, but once in place they can be used year after year to reduce your tax liability, so you can keep more money in your pocket and send less to the IRS.
Being self-employed and working from home can be great, but it is important to be prepared for the realities. One of those unpleasant realities is taxes, and keeping track of your work at home tax forms will be important as you make the transition. The tips listed above can help you keep proper records, stay on the right side of the IRS and even reduce your tax liability.
OWE BACK TAXES?
Our Dearborn, Michigan based firm specializes in tax planning and tax resolution. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, please call or email our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem. www.mytaxcoaching.com/relief