The first step to getting organized is to separate your freelance income from other types of income. Keep a record of all your business-related income. Your clients may send you a Form 1099-MISC in January or February to report total payments for the previous year. Form 1099-MISC is used to report income you received. The IRS also gets a copy of any 1099s. Your total business income on Schedule C Line 1 should be greater than or equal to the total amount of income reported on your 1099-MISC forms. If you report less income on your Schedule C than reported on your 1099s, you will get a computer-generated audit notice from the IRS asking you to explain the discrepancy.
The second step to getting organized is keeping track of your business-related expenses. Try using the same categories on the Schedule C to categorize your expenses. You can track your expenses using envelopes to sort receipts, or using a spreadsheet program, or using a financial software program. The important thing to remember is you'll need to keep track of who you paid, the amount spent, when it was paid, and what the expense was for (that is, the category or type of expense).
The most relevant categories of expenses for freelance writers include:
- Advertising – this includes business cards and web-marketing
- Insurance – for life, property & casualty, or business insurance. Do not include health insurance under this category.
- Other interest – credit card or loan interest, such as interest paid on your computer loan.
- Legal and professional services – such as fees your accountant will charge
- Office expense – anything other than routine supplies.
- Rent or lease other business property – rent paid on a writer's studio, for example
- Repairs and maintenance – repairing your computer, for example
- Supplies – routine office supplies like paper, toner, pens, pencils, notepads, etc.
- Travel – the cost of traveling to a convention, meeting, or business trip
- Meals and entertainment – the cost of business meals, but be careful not to go overboard here as this is a common target in an IRS audit.
- Utilities –electricity, gas
- Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.
If your expense does not fit neatly into one the categories above, don’t worry. Just create a new category, and put it in Part V for "Other Expenses." We would put Dues & Subscriptions, Business Telephone, and Website Development under Part V.
Health Insurance expenses. If you are self-employed and you pay for your own health insurance, then you can deduct the full cost of your health insurance premiums on your Form 1040 as a personal deduction. In order to deduct your health insurance expenses, you must have a net profit from your business. If you have zero profit or a net loss, you can still deduct the health insurance premiums. But instead of going on Line 31, you deduct them on Schedule A as a medical expense. For record keeping purposes, be sure to make a separate category for health insurance expenses since that figure will be reporting elsewhere on your tax return.
Equipment. Keep track of computer equipment, software, furniture and other fixed assets in a separate expense category. When it comes time to work on depreciation expenses, you'll need to know when a particular piece of equipment was purchased as well as its cost and the type of equipment that was purchased.
Estimated tax payments. Be sure to keep track of estimated tax payments to federal and state governments. This might not show up clearly if you run an expense report just for the calendar year, as the final estimated payment is due in January.
