As most people know, freelancing is on the rise in the U.S. economy. In fact, it’s currently often referred to as a “gig economy.” A recent comprehensive report on freelancing, “Freelancing in America 2017” released by Upwork and the Freelancers Union, states that 36% of our workforce is comprised of freelancers. Furthermore, they go on to predict that “The majority of the U.S. workforce will soon freelance.” It is obviously more important than ever for people to know how to track freelance income for their tax returns.
This is true whether you work full-time as a freelancer or just have a side gig in addition to a more traditional source of income. As soon as income starts rolling in from freelancing, you need to start tracking it. Here are some suggestions to help you.
Tools to Track Freelance Income
Everyone who works for a traditional employer receives a W-2 form in order to prepare their taxes, but the self-employed freelancer, sometimes known as an independent contractor, receives 1099 forms instead. Many freelancers rely solely on these 1099 forms that those who hire them must provide as tax season begins. Although you certainly need to keep track of all your 1099s, this isn’t the only way to track your income. In fact, you need to be wary of relying on them too much for several reasons:
- Some of the people you work for will forget to file them
- They are occasionally lost in the mail
- Sometimes they are inaccurate
Billing your clients with invoices is a good way to keep track of your income, especially if some of your customers pay with cash. It’s also a good backup to 1099s – if a client forgets to send you a 1099 but you have a copy of the invoice you billed them with, you will have an accurate record of your income.
Bookkeeping Software like Quickbooks
Software is a great way to track freelance income. The only downside is that you have to remember to enter all the information in order to keep it accurate. Also, it can sometimes feel overwhelming to learn how to use. On the other hand, a significant benefit to software is that it can help you keep accurate records of other information you, or your tax preparer, will need during tax season, like business expenses.
Some self-employed people use records of every deposit made to their business account for income tracking purposes. This method can be flawed. They may forget that some of the deposits were not actually from income but another source, such as a gift.
Spreadsheets like Excel
This method of tracking your income won’t be for everyone. Many people glaze over just at the word “spreadsheet.” But if they appeal to you, spreadsheets are another great way to keep accurate records. Again, the only weakness is the human factor– you have to remember to enter every bit of income information.
Whichever method or combination of tools you choose to track freelance income, the most vital thing is that you track every dollar accurately and that you do as soon as you start earning.