If you made money from freelancing or gig economy work in 2020, you will receive a new tax form by February 1, 2021—Form 1099-NEC. This replaces Form 1099-MISC, which companies have to send when you earn $600 or more. Although there are still limited details about Form 1099-NEC, you can find the latest version (currently a draft) and future filing instructions here.
Prepare for next year’s tax season
While tax season may seem far away, it’s already the fourth quarter of 2020. In three months it’ll be time to gather tax paperwork, including copies of the new Form 1099-NEC. In the meantime, you can start getting organized—and cut back on future stress—with these moves.
Tally your income by company
Most folks use the cash basis method for accounting, which means you pay taxes on the money you have received. Depending on how quickly you receive payments, your income may be different than how much you have received by the end of the year.
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To get organized, start by tallying the income you have received from each company. You can use a spreadsheet or free software like Wave to save time. Once you complete it, try to keep it up-to-date through the end of December.
Here’s why it matters: As you receive Form 1099-NEC from each company, you should make sure the income in Box 1 is correct. Companies also send a copy to the IRS—so if the amount in Box 1 is too high, you could have to pay taxes on income you didn’t receive.
Add up your business expenses
Ideally, you already have a separate checking account and credit card for your business income and expenses. But if not, you can minimize stress by making a list of your business expenses and start gathering your receipts.
For example, you may qualify for the home office tax deduction. If you used your home internet and cell phone for business, you may also be able to write off part of those bills. You can see a list of deductible business expenses on Schedule C, where you report the profit or loss for your business.
You may take it a step further by organizing each expense into categories—like advertising, contract labor, travel, meals, utilities, and more—which may save time for you or your accountant on tax day.
Although it’s not technically a business expense, sole proprietors may also deduct health insurance premiums. These premiums go “above-the-line” on Schedule 1 of Form 1040—and like the health savings account contribution deduction, you may qualify whether you itemize tax deductions or not.