Are you a first-time freelancer? Have you taken on temporary project- or contract-based work? Congratulations on becoming self-employed! If you didn't know this type of work is considered self-employment, you have lots of company. The Small Business Committee of the U.S. House of Representatives recently held hearings that indicated many new entrepreneurs are unaware of some or all tax filing responsibilities. Here are issues to know about.
- Recordkeeping. Tracking your income and the hours you spend working in your business makes filing your tax return easier. You can also use good records to help prove that your business is not a hobby. That's important because expenses from hobbies are limited, unlike the costs of running a business. Other uses for your records include support for valuable credits and deductions, and the ability to reconcile the income you make against what is reported to the IRS. You should also note that all the income you earn is taxable, whether or not you receive a form such as a 1099.
- Estimated tax rules. When you're self-employed, you're responsible for paying federal and state withholding as well as self-employment tax. In general, you have to prepay these taxes on a quarterly basis when you expect to owe $1,000 or more with your return. There are exceptions, but the best way to know if you qualify is to calculate your expected income. Failing to make estimated tax payments can lead to penalties.
From whatever source you earn income, keeping up with filing requirements can save you money. Contact us for help.
