How to manage your taxes when you work as an independent contractor
My husband and I just finished our refinancing application. I don’t believe that the small, conservative bank we worked with was expecting the 30 or so little pieces of paper documenting our income for the past 2 years. A standard employee only has one, maybe 2, pieces of paper sent to them at the end of the year. But paperwork is unfortunately a way of life for the independent artist, and independent contractors everywhere can benefit from keeping the mess of 1099s organized. It will make doing your taxes well, not fun, exactly but much easier, faster, and profitable.
Here are the three basic principles of independent contractor money management:
1) Track your income
This one trick has saved my husband and I tons of time at the end of the year. Create an Excel Spreadsheet labeled “Income 2009”, and list every individual job on it. Track the contact information for each, as well as the date you were awarded the job, what days you worked, what your promised pay was, the date you were paid (and any differing amounts), the date the check was deposited, the date you received the W-2, and any expenses you incurred for the job (in our case, this involved parking, mileage, and occasional purchase of costumes or makeup).
This way, you have access to an ongoing total of what your income is, how much money you should have saved, and (just as important!) if anyone still owes you either money or paperwork.
Trust me, it will save you weeks of aggravation between February and April. It will also limit the number of conversations like this one (an actual conversation from our L.A. days):
“Honey, what about that extra work you did?”
“Which extra work?”
“The Army-Iraqi thing”
“Oh the one where I was dead on the ground the whole time?”
“No, the one where you shot someone and then died on an airplane”
“I think I got paid for that let me see what was the name of that production company again Discovery Portals?”
“I thought that was the company that paid you to perform office pranks.”
2) Track your (potentially) deductible expenses throughout the year
Whenever you find yourself with a receipt for one of these items, immediately make a copy and stick it in a file that you have set aside for “2009” taxes.
Any expense related to a home office (including the furnishings)
Interest paid on mortgage
Interest paid on student loans
Medical Expenses (including any health insurance that you pay)
Gifts and donations to charity
Artist Expenses (supplies, marketing materials)
Fuel and auto maintenance (track mileage commuting to and from auditions, interviews, and jobs)
Professional associations and membership fees
Education expenses (tuition and books)
You can also create a spreadsheet to track this information if you wish. That is organization beyond my time commitment.
Be aware that some of these deductions and credits may not apply to you (the “qualified performing artist” credit essentially never applies to artists capable of making a living), or may only be available if you itemize your deductions. Try tallying your itemized expenses first (they can be found on Schedule A) and see if you can save more by itemizing. As a general rule, people who own property benefit, and those who rent are out of luck.
3) Automatically save 25% of your earnings for taxes
Yes, I know that this can be an ultra-difficult thing to do. It is always hard to part with money that you have worked hard for. But remember, no matter how tightly you feel squeezed, the government is going to come looking for their money eventually. They will not care if you are behind on your rent, or if you just need a few extra dollars to get through the month.
Set up a savings account (the kind with no fees and no minimum balance) and immediately transfer 25% of every paycheck into that account. If there is money leftover once the year’s taxes has been paid, so much the better! Trust me on this one it is much easier to scrimp all year long than to grow a few thousand dollars just once a year.
That’s it. Simple, right? In fact, the toughest part of this recordkeeping process is simply making the continued effort to maintain it. If you can discipline yourself to follow these 3 steps, your tax return day’ will be as simple and painless as it can be for the independent worker.