Preparing taxes can be a daunting task whether filing online or hiring a tax preparer. Getting all the necessary paperwork for your 1040 form is essential and means getting a year of finances organized and labeled. Working as a freelance or contract individual, it’s a must to keep track of finances and taxes.
Shaquana McCrae, Kaplan Accountant and PTIN Tax Expert, says, “When you’re paid as a contract worker taxes are not deducted automatically, and take-home pay for the self-employed tends to be higher than for those who are employees.” While it may be tempting to keep all the earnings that come in tax-free, you don’t want the IRS knocking at the door.
When you file, the 1099-MISC form is provided by the employer, as it is for self-employed individuals who did contract work during the year. The minimum earnings to report income when filing is $600.
According to USA.gov, there are a couple other forms that could be included, depending on your income for the previous year:
“When you’re a contract worker, you have to pay a self-employment tax along with the income tax. An SE tax is a Social Security and Medicare tax, which is also separate from income tax,” said McCrae. You find out the SE Tax after determining the net profit or loss with a Schedule C.
It may seem a lot more work to file under a contract position, but it can become a seamless process once you have been doing it for a while. Hair Stylist Jasmine Briscoe has been doing her and her husband’s taxes for the past seven years.
She does find it somewhat of a chore but by doing it herself, she knows it’s done correctly rather than potentially overpaying.
She usually begins preparing her taxes by the first of every new year, and she typically pulls transactions from businesses she uses to purchase products for clients. “For example, CosmoProf is a professional distributor; they keep track of your purchases for the entire year. I keep track of physical sales by calendar in my phone. I like to keep copies of certain things on my Google Drive like receipts for write-offs,” said Briscoe.
This type of organization and information storing can definitely make things easier when tax season rolls around and keeping track of the essential income and expenses for contract work is pertinent.
Filing taxes is a necessary evil but learning some financial literacy and knowing what documents are required to complete a 1040 form will only make you more aware of your earnings as a self-employed individual. Some key takeaway advice is to not be afraid to ask for help and stay organized. Briscoe also suggests keeping a record of cash-based payments received and realistic business expenses.
If you have to file estimated quarterly taxes, you file a 1040-ES document, Estimated Tax for Individuals, which is similar to the 1040 worksheet. According to an eFile.com article Taxes for the Self-Employed and Independent Contractors, “If you are self-employed, and you expect to owe $1,000 or more in taxes when you file your return, then the IRS requires you to make quarterly estimated tax payments. Estimated tax payments are used to pay income tax and self-employment tax.”
Even though you may be required to pay estimated taxes quarterly, you still must file an annual return, aggregating all the quarterlies.
Another document added to the bunch for filing a 1040 form, but it literally pays to be prepared when it comes to the money you earn by doing something you enjoy.
This article is not a replacement for personal financial tax advice. Please always consult a tax professional.