If this is your first year filing taxes with more than just your employer’s W2 (or without an employer at all), it’s probably keeping you up at night. Self-employment tax. Income tax. Quarterly payments. Penalties. Filing the first time can be so stressful that you put it off until the last minute or worse, don’t file at all.
Don’t do that.
We know it’s overwhelming, but let’s take things one at a time to help unravel the process. The most important thing is getting started, so here’s what you need to do to get the process rolling.
Find Out How Much You Made
When you had an employer, your earnings came packaged neatly on a single paper ready to plug into the EZ form. Now, you need to track down what you’ve made on your own.
• 1099: If you filled out a W-9 form, your clients will be sending you a 1099 with the total amount in payouts. These are due to you by January 31, so begin looking for them in your mailbox. Hopefully, you’ve kept your own records so that you can start to make predictions, but if you didn’t, these forms are an excellent place to start.
• 1099 K: If your clients primarily paid you through PayPal, they may be taking advantage of PayPal’s 1099 K. PayPal reports earnings to the IRS as well, so if a client paid you primarily through PayPal, they might not send a 1099 at all.
To find your PayPal statement, click “activity” and then “statements.” You should be able to see options for tax documents divided by the year. PayPal posts these documents by January 31 as well, so make sure you add those documents to your list.
You must report all income regardless of whether you receive a 1099 or 1099 K. When you have a total, you’re ready to calculate the taxes you owe for the year against what you (hopefully) paid in quarterly estimated taxes. Underpayments will need to be rectified at your yearly tax filing while overpayments can be submitted for a refund.
Classify Your Expenses
Many business expenses are tax deductible, reducing your overall tax obligation. If you haven’t set up a separate account for your business expenses, you’ll need to separate out the personal from business.
Go through your bank statements so that you can itemize your expenses for possible deductions. If you’re stuck doing this on paper, you aren’t alone. Carve out time each day to classify those expenses and then make a plan going forward to create a better record keeping system.
Some common business expenses you may be able to deduct are:
• Mileage: travel expenses done for work (and only for work) can be deducted as long as the purpose for the trip is clear and that the only thing you were doing was working.
• Home office: Listen up, freelancers! If you have a dedicated space for work, you may be able to deduct it on your taxes. The area cannot be multifunctional - so no, your kitchen table isn’t eligible unless you don’t use it for any other activities - but a small office space is. The deduction will depend on the size of the space, so look into that.
• Service and Product Fees: The software you use to keep track of business expenses, invoicing systems, a business phone (again, solely business; no double duty), and other types of expenses you pay to keep your business running may also tax deductible.
Do some research from reputable sources to find other deductions that may apply to you. Always read the fine print, and if you aren’t sure you qualify, don’t hope for the best. Avoid that deduction until you’re confident it applies to you because you can always file an amended return later.
Plan For Next Year
Unless you’re one of a few rare individuals, your first tax year is probably disorganized. It’s nothing to be ashamed of because you’re a beginner, but now is the perfect time to make a plan. Notice what’s not working, what’s causing you stress, and what’s sucking up an incredible amount of time and energy now and make a plan to alleviate that stress for next year. Here are a few tips for moving forward:
• Save as you go: If you didn’t know about - or just didn’t make - quarterly tax payments, you may be scrambling to make your tax payment all at once. You’re subject to penalties from the IRS and could be paying that tax bill off well into the future. It’s nothing to be ashamed of but make a plan now to save with each check so you aren’t surprised next year. Catch offers a simple method to help you not only wrangle your taxes, but also save for retirement and emergencies. This time next year, you’ll be ready for tax time.
• Open a business account: It doesn’t have to be specifically a business account, but a separate account where you direct your business expenses can save a massive headache. Talk to your financial institution about the benefits of opening a specific business account, but whatever you choose, get those personal and business streams separated.
• Invest in software: If you process a lot of receipts, invest in a paperless conversion system. If you invoice, find a software that helps you keep track of invoices and their related billable hours. If you travel a lot for your business, a mileage tracker is a must. The section of your business that you’re struggling to organize now? There’s an app for that. Promise.
File And Move On
So you didn’t get on top of your taxes perfectly this first year, and that’s ok. The most important thing is to move forward and fix the mistake instead of hoping for the best. The mistakes you make your first year help you prepare for the next year. Hire a professional if you need to, but the most crucial move is just to get started.
The most important thing this year is to make a plan to account for taxes before April 15 of next year. IRS penalties will sink you if you wing it every year, but there are ways to get on top of your taxes. Catch offers a tax program to take your withholding right off the top so you never even see it. It’s too easy to put money in a savings account and move it right back out. With Catch, it’s out of sight and automatic.
Make your plans now to solve the headaches of tax time, and we’ll see you on the other side!