What Freelancers Should Know About the New Tax Form
If you made money in 2020 freelancing or working in the gig economy, you will receive a new tax form by February 1, 2021 – Form 1099-NEC . This replaces the 1099-MISC that companies must send when you make $ 600 or more. While details on Form 1099-NEC are still limited, you can find the latest version (currently a draft) and future filing instructions here .
Prepare for tax season next year
While tax season may seem distant, this is the fourth quarter of 2020. In three months time, it will be time to collect tax documents, including copies of the new 1099-NEC form. Until then, you can start organizing – and reduce future stress – through these activities.
Calculate your income by company
Most people use the cash method for accounting, which means that you pay taxes on the money you receive. Depending on how quickly you receive payments, your income may differ from how much you received at the end of the year.
To get organized, start by counting the income generated by each company. You can use a spreadsheet or free software like Wave to save time. After you fill it out, try to keep it up to date until the end of December.
This is why this is important: When you receive your Form 1099-NEC from each company, you must make sure that the income in column 1 is correct. Companies also send a copy to the IRS, so if the amount in column 1 is too high, you may have to pay taxes on income you did not receive.
Add up your business expenses
Ideally, you already have a separate checking account and credit card for your business income and expenses. But if not, you can minimize your stress by listing your business expenses and starting to collect receipts.
For example, you can claim a home office tax deduction . If you’ve used your home Internet and mobile phone for business, you can also write off some of these bills. You can see a list of business expenses to be deducted from the tax base, in the Annex the C , where you specify the profit or loss for the business. You can take it a step further by breaking down all expenses by category – like advertising, contract work, travel, food, utilities, etc., and more, which can save you or your accountant time on tax day.
While not technically a business expense, self-employed individuals can also withhold health insurance premiums. These premiums go “above the line” on Schedule 1 of Form 1040 – and, like the health savings account premium deduction, you may be eligible for tax deductions or not.