Developing good record-keeping and accounting habits is essential for 1099 workers. This is because the burden is on you, not an employer, to complete most accounting tasks. Follow these tips to improve your approach to accounting and position your business for financial success.
Your 1099 form isn't the only form 1099 workers need to keep handy to appease Uncle Sam at tax time. When completing an income statement, you will need records on income received and expenses incurred. Or, if creating a balance sheet, you will need access to data on your assets, liabilities and equity. You will need to well-kept records to accurately report income and deductible expenses. If you ever face an audit, the IRS will ask for this documented proof. There are a variety of records the IRS advises keeping:
You can track any information not captured on a form in a journal, ledger or via electronic means. You should keep records for at least 3 years after you file but there's no harm in holding on to it for longer.
The amount you can deduct for qualifying business expenses is limited to the business use percentage of the expense. For example, if you want to deduct cell phone costs, it is not enough to track the total cost of cellular expenses over the year. You need to assess what percentage of the total cost was allocated for business use. For this reason, it is wise to figure and record business use percentage early and often. You can reference formal documents, such as itemized cellular phone bills, for help in breaking down charges by use.
The income you report to Uncle Sam for each of your clients needs to match the income reported on the 1099-MISC (if you received one). Make sure any manually recorded earnings reflect the amount shown on the 1099-MISC. Do this before reporting it on your income tax statement. Try to correct discrepancies as early as possible.
Stashing a dedicated amount in a separate location can help 1099 workers with quarterly estimated taxes. This can help you avoid the temptation of dipping into these funds for non-essential purposes. There are a variety of banks, online and off, that will allow you to create distinct goals for dedicated purposes. Whatever you choose, be sure it allows you to easily withdraw funds to make your quarterly payments to the IRS.