words Al Woods
For many businesses and self employed workers such as contractors and freelancers, the challenge when preparing tax information each year for the IRS (Internal Revenue Service) is rounding up all the relevant paperwork and preparing the information in the right way.
The IRS website has a list of over 900 different forms relating to recording financial information, but fortunately you probably won’t need to concern yourself with the vast majority of them. That said, there are various common types, including 1099 forms, you may well need to complete and retain.
What to provide
Along with paperwork there’s key financial information such as income and expenditure and basic other details:
Income recording – round up all documentation showing income for the past year.
Invoices – have them in date order and ensure the amounts are all properly recorded in your main income and expenditure spreadsheet.
W-2 forms – if you earn income through employed work, the employer should issue you with a W-2 by January 31.
1099 forms – you’ll have received one for various payments received. There are several variants of a 1099 form, so what type of payment or profit you’re receiving will determine which version of the form you get.
For example, if you undertook contracted or freelance work for someone they’ll issue you the 1099-MISC version with what they paid you listed on it. If you’ve received income from investments you’ll receive a 1099-INT version.
Expenses can cause the IRS to look closely at your affairs and even instigate an audit if you don’t record them properly or claim what is inappropriate.
The golden rule is only to claim for what is a genuine business expense and ensure it’s properly documented and recorded. To this end you need receipts. If you are missing any do what you can to obtain them before claiming.
Also, double check you can claim something as an expense. Rules do change so ask your accountant or tax professional to look into this for you.
Be fair and accurate with expenses such as motoring and transport costs. Have proper mileage sheets to properly record what business mileage was incurred but beware of overdoing it. The IRS has various ‘models’ of what certain business types would typically claim so can easily compare yours to the accepted norm.
If you’re seen to be claiming more transport costs than is typical for your business type, the IRS could question this.
Be careful if you’re a cash business
The IRS is particularly vigilant with cash businesses so be careful when recording income and expenses.
The IRS is very capable of detecting if reported income levels don’t tally with lifestyles and standards of living. For example, showing ‘just getting by’ levels of income in your tax return yet showing off a new luxury car or holiday snaps from far flung destinations on social media. The IRS does have ways of checking and it could see you on the wrong end of an audit.
Your accountant will know what the IRS expects in terms of reporting financial information, but it’s likely to be at least a profit and loss statement and maybe a balance sheet along with your completed tax return.