Financial Health

How Tracking Your Expenses Helps You on Your Taxes

Before Holly Tuckett quit her job as a postal carrier in 2006 to pursue a career in film, she did all she could to prepare.

She invested her time and money in training and equipment. She bought cameras, computers and editing software, she apprenticed and she networked. In time, her well-done jobs on film sets turned into referrals for other projects and Tuckett was on her way to building her freelance videography business.

But like many whose primary income comes from freelance or contract work, what Tuckett didn’t plan for was tracking and organizing her finances.

“I didn’t have any idea how to do it,” said Tuckett, now an award-winning documentary film director living in Utah.

So she did the bare minimum: Tracking income and expenses — storing receipts in a shoebox all yearand then turning to an online tax program when it was time to file a return. But without a good understanding of state or federal tax laws, Tuckett says she made some mistakes. She didn’t know, for example, what she could write off and may have overpaid her taxes.

A few years later, she ran into trouble when state regulators noticed she had failed to pay property taxes due on the equipment in her office.

“I had no idea that was a thing,” the 50-something Tuckett said, adding that she paid a fine for the misstep.

This kind of tax-time mistake can be easy to make, financial experts say. That’s why it’s so important for independent contractors or project-based workers to track their income carefully and know their responsibilities.

When you’re working for yourself, the buck stops with you, not with an employer who has done all the bookkeeping and can tell you what you’ve earned, New York tax expert Phyllis Jo Kubey says.

“As an independent contractor, you track and report your income,” said Kubey, who has more than three decades of tax prep experience, much of it working with independent contractors in the entertainment industry.  “Many people, being passionate and focused on their business area, neglect their bookkeeping, record keeping and tax compliance.”

It doesn’t have to be scary and there is bounty of resources available to help contract workers get off on the right financial foot, Kubey says.

The Small Business Administration (SBA), for example, offers some courses and it has a free mentoring service, through SCORE — the Service Core of Retired Executives — that can help contractors develop a business plan.

The Internal Revenue Service also has web pages specifically for self-employed taxpayers to help clarify their rules, Kubey said.

“Many states also have helpful online resources,” she said. “NASE (National Association for the Self-Employed) is one professional organization that serves independent contractors.”

Among her other recommendations:

Know your forms

There are different types of IRS forms for 1099 contract workers. Each has different filing requirements that can turn on the details of how much you earn from an individual client, type of expenses you incur, how you get paid or whether the income you earned was reported by the payer. Understanding the difference matters.

Find a system and use it

Whether you track your income on paper, use software, or hire financial professionals to help, Kubey says its important to develop a system that works for you and then use it. It’s important to track both your income and expenses regularly so that you don’t find yourself trying to reconstruct a years-worth of data at crunch time.

“You can’t wait until the end of the tax year to look at the year’s activity,” she said. “If you don’t have your records together, whether you do your taxes yourself or hire someone like me to assist you, tax preparation is much more difficult.”

Don’t forget to pay as you go

Carefully tracking your finances is also important because independent contractors are required to make quarterly — or other periodic — payments toward their expected tax bill, Kubey says. Failing to pay as you go, may leave you with an end-of year underpayment penalty.

Kubey says the mistake she sees independent contractors make most often is that they either ignore their tax and financial responsibilities, or they delegate the job, not paying close attention to the details.

That can lead to problems that can be avoided, she says, by getting your books and records properly set up at the start.

That’s advice Tuckett wishes she’d had. And although it took a few years, the videographer says she’s finally graduated from a shoebox full of receipts and scribbled records to a combined system of paper and electronic records that she regularly hands off to an accountant.

“She calls me her most organized client,” Tuckett said.