So You’re a 1099 — Now What?
You have decided to leave your employer and make a go at a consulting business on your own. Perhaps you were a stay at home mom and now the kids are in school and you opened up a small interior design business from your home. Or, you are the recent graduate of an arts and design school and have chosen to open your first photography business. All three of the scenarios fall under the umbrella of being a ‘freelancer.’ So what happens when you initially collect your first checks for a job well done?
If you started a business as a freelancer, consultant, or some home based business, most of you will earn your first 1099 this year and will likely have to file Schedule C (sole proprietor) with your first year of income. Here are five business moves you should make as a freelancer.
- Set up a separate business checking account and a business credit card. It is not a good idea to run your business expenses through your personal checking or your personal credit card. It will be confusing to someone (most notably the IRS) looking at your business to understand why you would pay for business expenses through a personal account. This is especially going to be true when it comes to things like meals, entertainment, and travel.
- Keep track of all startup costs. Did you have any specific equipment, furniture, or other items that needed to be bought to start your business or necessary for you to do your freelancing job? Some or all of these expenses may be deductible to your business. You can keep all of your receipts in a folder or use a piece of software such as Neat Receipts.
- Keep a log of all of the miles you drive during the course of the year that are attributable to your business. You may deduct the actual expenses related to the upkeep of the car or the mileage at tax time. You should keep records on both.
- Get store cards in the name of your business. Ultimately, you will be buying supplies at places like Office Depot or Staples. Make sure you have a business account with that store. You might get a business account with a place like Costco or Sam’s for the bulk supplies/items you will need in your business. In general, it is crucial that these cards are in the name of your business so you can make a separation of church and state.
- Create an estimated tax account and set aside at least 25% of the checks you collect. While you should really talk with your CPA to determine your individual federal and state income tax rate, it’s going to be up to you to withhold taxes. Don’t forget that you burden both halves of the social security tax. In the past, your employer paid half of that for you. Consequently, a common rookie mistake is to spend the money you make during the year and then get stuck with a tax bill come April. By setting aside a percentage of every check you earn, you won’t leave yourself in a precarious situation come tax time.
More on taxes: [eBook] Home Office Tax Deductions
If you are a freelancer and get a 1099, a sole proprietor form of entity will happen de facto if you choose no other form of entity for your business. Remember, it will be your responsibility now to determine how much tax you owe. In addition, as a sole proprietor, you will be responsible to pay both halves of the Social Security and Medicare tax. While the sole proprietorship is extremely easy to get up and running, one major downside is unlimited liability. Should you get sued, it is possible to go after your personal assets beyond the assets in the business. This is a major consideration depending upon the type of freelancing you are doing within your business. Now that you have the freedom to run your own show as a freelancer, make sure you start to make quality business moves so you don’t steer your new business venture into the ground.
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