How do I sort out my freelance tax disaster?

February 6, 2006 10:18 PM

I did a lot of freelance work last year but didn't keep good records. What's the best way to find out what I owe for 2005 & avoid the problem this year?

I quit my job & started freelancing last June, but recklessly procrastinated about getting some sort of accounting system in place until...now. I have some records, but they're patchy. I didn't do a good job of saving receipts for deductions. What's the best way to organize this mess? Should I call up all my clients & ask what they've reported paying me? Just try to estimate? & to avoid this terror again, any suggestions on organizing yourself financially for taxes if you're self-employed? I just need some system I'll keep up with....ledger? software? what works for you?

posted by octavia to work & money (10 comments total)

Do you have copies of all your contracts? Can you access bank account records? Do you charge expenses to your credit card?

For next year, get a set of files. Put them on your desk in your entry way or on your office desk or wherever works. Label them 2006 Expenses, 2006 Business-use-of-Home, 2006 Personal Income Tax deductions, 2006 Financial Statements, 2006 invoices and payments, and 2006 Income Tax materials. Put all your business expense receipts in the Expenses folder. Put any rent/mortgage, maintenance, renovation, utility and related receipts in the Home folder. Put government forms, retirement savings contribution receipts and the like in your Personal Tax folder. Put all your bank and credit card receipts in the Financial Statements folder. Put print outs of all invoices and payments in the Invoices folder. And leave the Income Tax file for any income tax-related things that don't fit in the other folders.

Then get Quickbooks and start using it to *at the very least* manage your invoices and accounts receivable.
posted by acoutu at 11:07 PM on February 6, 2006

Oh and then take all the folders to an accountant at the end of the year. If you're not detail-oriented, an accountant may be a lifesaver for you.
posted by acoutu at 11:08 PM on February 6, 2006

If you're in the U.S., you should have received your 1099s from freelance clients by now, if they're reporting what they've paid you. Call them to find out.
posted by Uccellina at 11:41 PM on February 6, 2006

Are you incorporated? If not, you'll likely get 1099's from those clients. Otherwise, can you get a year end statement from your bank. You can go thru and highlight all the credits to help figure out what you made. I'm terrible at record keeping, but all these web tools really help me out. I use an invoicing/time keeping service that adds up all my recievables nicely.
For expenses - i'm a web developer so it's just estimating my office space deduction and adding up all my hosting fees and any stuff that I can prove.
(oh, and i'm going to an accountant this week to try to figure out how to cut down my tax bill to something more reasonable... oy.)
posted by muddylemon at 11:41 PM on February 6, 2006

1099s are the way to go. If a client paid you more than $600 in the calendar year, they're obligated to provide you one, and it shows exactly how much they paid you.

As for record-keeping for the future, you don't need anything fancy; most things that I can deduct as business expenses are online services which provide monthly invoices (Basecamp, Browsercam, etc.), and for incoming funds I hang onto copies of my own invoices to clients and match them up with the 1099s at the end of the year, or just go with the invoice if I don't get a 1099 from a particular client.

Also, some businesses don't have enough overhead and expenses to justify itemized deductions, and my own (web design/development) happens to be one of them; though I've got records I can use to add it all up, I doubt the itemized total would exceed the free standard deduction the IRS gives me, so records of deductible expenses may turn out to be a non-issue (though I'll hang on to them anyway).
posted by ubernostrum at 1:43 AM on February 7, 2006

Also, some businesses don't have enough overhead and expenses to justify itemized deductions, and my own (web design/development) happens to be one of them; though I've got records I can use to add it all up, I doubt the itemized total would exceed the free standard deduction the IRS gives me, so records of deductible expenses may turn out to be a non-issue (though I'll hang on to them anyway).

That may be the case if you're filing as a business, but I get the impression the original poster is just going to file this income on their own personal return, on a schedule C. In that case, it isn't itemizing, it's just deducting all your expenses, and worthwhile even if it's as little as $5 for some paper. You still pick from an itemized (schedule A) deduction or the standard for the personal part of the return.
posted by Kellydamnit at 5:57 AM on February 7, 2006

In addition to the good advice above, I'd suggest paying your estimated taxes quarterly; it can save you a lot of headaches (and cash) come April. See this article for more info on that.
posted by smich at 6:13 AM on February 7, 2006

Don't you send your clients invoices? Do you have copies or source files for these? That's basically how I figure out how much I made (not all my clients are in the USA, so I don't get 1099s from all of them). For you, you should have started receiving 1099s already; your clients should have at least called you up to ask your SSN if they didn't have it already. If nothing else, this will be a good pretext for you to call them.

Agree on paying your quarterlies. You get socked with interest and (according to my tax guy) get closer scrutiny from the IRS if you don't.
posted by adamrice at 7:37 AM on February 7, 2006

Once you get your 1099s/receipts/whatever together, you still need to figure out what you owe. To do that easily and cheaply, I'd recommend skipping an accountant and going directly to TurboTax. Their step-by-step process is incredibly simple -- even for a math/tax/form-filling dolt like me. It asks for all your possible deductions and does a darned good job of explaining what they are. You can see what you owe, go back and make adjustments as needed, and -- best of all -- not pay anything until you actually file your taxes.

Depending on what you find out, you might want to take the whole lot to an accountant to see if there are any additional savings available to you. Or, like me, go ahead and file using TurboTax. I was freelance for three years and found it to be a great, inexpensive solution.

Good luck. (P.S. -- I'm not affiliated with Quicken or TurboTax in any way. Just a satisfied customer.)
posted by CMichaelCook at 7:45 AM on February 7, 2006

I did the same thing when I first started out. Are customers sending you 1099s? Can you refernce them? I went back to my project files and for the year and added up what I charged them. I didn't keep good records, but I was able to go back to these files/folders by date and kinda link them to my checking account deposits. As far as invoicing take a look at http://www.blinksale.com/. Good Luck!
posted by johnd101 at 10:03 AM on February 8, 2006