Self-employment is growing at a rapid rate, with projections of 42 million Americans joining the ranks by 2020. As more people forgo the regular nine-to-five in favor of freelancing and startups, finances get complicated. When you work for a company, filling out a W-2 is fairly straight-forward.
Working for yourself means more responsibilities and more paperwork. It needs to be done properly, though, or risk major fines and fees. Freelancers can still generate a pay stub and come out ahead if they file and save paperwork properly.
Use this quick guide to provide all the proof of self-employment for the IRS.
Get the Right Forms to File
In order to provide an accurate recording of your income, you need the right forms. Freelancers will need a 1099-MISC form. If you run a business, you should get a 1099-K.
How you define yourself as self-employed will come down to whether you have an LLC and documentation. As a business owner, you can take advantage of numerous tax deductions from working at home, using your vehicle to travel, and etc.
How well you document these expenses will determine how much you’ll pay in taxes.
Business Bank Accounts
Another important facet of tracking your income. Bank statements showing money coming and going from a personal bank account may get flagged for an audit. Bank accounts under your business’ LLC help differentiate your claims.
We live in a time where there are multiple programs for every life function. All of this is in the palm of your hands, thanks to the evolution of cell phones and apps. Online tax prep software works best alongside spreadsheet software and financial apps, such as Prism. This allows you to get a snapshot of your finances to understand what your taxes should look like.
Generate a Pay Stub
Other great software, such as a pay stub creator, lets you keep track of income and necessary deductions in real time. This is much easier than calculating everything after the fact. Learn more info about how pay stub software can save you a lot of time and money.
Your pay stub should accompany all other income, expenditures, and business investments. Then, you can generate a clear profit and loss statement to take advantage of tax seasons. Timing this correctly can inflate company valuations while saving a ton on taxes.
Growing and Reinvesting
Running your own business and working for yourself comes with big responsibilities. Don’t play chicken with the IRS or skimp with documentation. Send invoices to clients, generate a pay stub to show income, and document all expenditures.
If you’re trading stocks and dealing with digital goods, this becomes even more important. Your accounts need to match your claims or you will get audited. Research what other self-employed people have done to avoid getting into trouble.
This is a great guide if you want to learn about how cryptocurrencies are effectively taxed. Learn this before dumping all your assets into an uncertain market or exchanging currencies.