If you are working as a freelancer or gig worker, you are certainly not alone. Millions of men and women are earning extra income driving for ride sharing services, designing websites for online entrepreneurs and writing for local businesses.

Some freelancers and gig workers have even said goodbye to their traditional careers, trading the security of a steady paycheck for the freedom and flexibility of gig work and freelance clients. But whether you are freelancing full time or just for extra cash, you need to keep careful records so come tax time, you can stay out of tax trouble.

Note: If you fall behind on filing your taxes, you’re not alone and we can help. Reach out to our tax resolution firm and we’ll help you file late tax returns and negotiate with the IRS if you owe back taxes.

Set Up a Separate Bank Account

Freelancers and gig workers play many roles but they all have one thing in common, they are also business owners.

Whether or not you have incorporated your business or formed a formal business, you do operate your own business. That means you need a separate bank account to collect your earnings and pay your expenses.

If you have not already done so, you should set up a separate bank account for your freelancing income. If you do have a formal business structure and an employer identification number (EIN), you can use that information to open the account. If not, you can simply open a second account to collect your payments and take care of any business-related expenses.

Print Reports from Payment Providers

Gig workers and freelancers are paid in many different ways, from direct payments from clients to automated clearinghouse (ACH) transfers to their bank accounts. These independent workers may also receive payment through third party apps like Paypal, Stripe and Payoneer, and keeping it all straight can be a real challenge.

Luckily many of the major payment providers make it easy to find out exactly how much their members received during a given time period. If you want to see where you stand, and how much tax you might owe, sign on and print out a payment report from every provider you receive income from.

You can fill out those reports with your own carefully kept records, including documentation of direct client payments and bank transfers. If you are unsure how much you have received via ACH, you can check with your bank or request a written report.

Signing up for a bookkeeping service or bookkeeping software can also help keep track of all your income and expenses.

Maintain Contact Information for Everyone You Have Worked For

During the course of a single year, freelancers and gig workers may work for dozens of individuals and companies, and they may receive payments from just as many sources. In a perfect world, everyone who hires those freelancers and gig workers would maintain their own records and send out 1099s for tax purposes, but that is far from guaranteed.

If you want to avoid unpleasant entanglements with the IRS, you need to keep your own records and check off each 1099 as it comes in. If you earned income from a client and do not receive a 1099, it is your responsibility to follow up and get the proper paperwork, so make your life easier and keep contact information from everyone you worked for, even if they were only a one-time client.

Keep a Running Tally with a Spreadsheet

It can be hard to track your income from freelance jobs and gig work, but a spreadsheet will make it easier. If you want to avoid underreporting your income and the tax penalties that could bring, set up a spreadsheet and record every dollar you earn from your freelancing and gig work efforts.

Keeping a running tally of your freelance and gig work income serves a number of different purposes. For one thing, it will help you determine the amount of your required quarterly income tax payments, so you do not overpay or underpay what you owe. Tallying your income as you go can also help you see how you are doing, making it easier to ramp up your freelancing and gig work efforts as you go.

Measure, Photograph and Document Your Home Office

As a freelancer or gig worker, you may be eligible for some generous income tax deductions, including a write-off for your home office. If you operate your freelancing business out of your home or find gig clients there, you may be able to deduct part of your utility bills, rent or mortgage and other applicable expenses.

Not just any space will do if you want to take the home office deduction, and proper documentation could be the difference between a valid deduction and a disallowed one. You must use your home office solely for your business, and it is important to keep careful records to avoid problems with the IRS.

That means measuring the space your home office occupies, so you can compare it to the total square footage of your home. It also means photographing the space, so you can show those images to the IRS if they question the deduction.

Scan Receipts to Make Tax Deductions Easier

You may also be eligible for additional tax deductions, including write-offs for office supplies, internet access and the like. But you will need to back up those deductions if the IRS comes calling, so make sure you have all those receipts on hand.

A shoebox full of paper receipts will not do, so make sure you scan or photograph those documents and keep them in a safe place. (Some receipts due to the paper used turns dark over time and can’t be read – Take That Photograph!) That could mean setting up a folder on your hard drive (with a backup plan in place), uploading the images to the cloud or a combination approach designed to safeguard records of your business-related purchases.

Life as a freelancer or gig worker can be wonderful, but keeping proper records is essential. From making tax planning easier and less stressful to saving you money, there are many advantages to keeping careful records.

If you do run into tax trouble, reach out to our tax resolution firm and we’ll schedule a confidential consultation to explain your options in full to permanently resolve your tax problem.