1099, Finances and Taxes, Freelancers, Self-Employed, Taxes

Tips to Prevent a Tax Audit

Getting your 1099 taxes done is one hurdle. You still have to worry about getting audited. Once April 15th has passed, the IRS will begin the process of identifying individuals to be audited. No one wants to be a part of that list. So here are some power tips to prevent a tax audit.

As you do your taxes this season, it’s important to ask yourself the right questions to lower the chances of the IRS auditing you. Keep in mind this list to help you avoid an audit on your 1099 taxes:

Will you get audited?

There are two ways you may get audited. First, the IRS may choose you randomly. While the chances are low, it is possible. Anyone can be audited. Secondly, you have a higher chance of being audited if you have suspicious tax activity.

Does everything match up on your documents and taxes?

One of the most common mistakes people make is incorrectly inputting their income on their tax return. You should make sure that your income matches what is listed on your W-2s and 1099s. The IRS is sent a copy of these documents as well. If your numbers don’t match up, they will know and this will make you more likely to get audited.

Did you document your expenses?

Often times for independent contractors, your expenses can lead to you getting audited. It’s one area that many people tend to make mistakes. When you are completing your Schedule C, make sure you can document the expenses you list in the event you are asked to. Also, as you decide what business expenses to write-off, keep in mind that they should be reasonable. The IRS requires that business expenses be ‘ordinary and necessary’. Otherwise, you should exclude them.

Are you living within your means?

One red flag that could trigger an audit is if you are spending more than you make or if you aren’t living within your means. For example, if you live in a wealthy area but have a low income, that may raise suspicions that all your income isn’t being reported. Make sure you can back everything up.

Do you have business partners?

If your business partners get audited, you essentially will be too. You may not be formally audited but since your income is tied to theirs, the IRS may look into your taxes as well or ask you for certain documents. Speak to your business partners so that you are all on the same page and know your business’ tax rules.

For more information about IRS audits, visit their website.

Finances and Taxes, Freelancers

Tip: Creating Invoices (Not everyone is Uberized)

All contractors should do it!

You need to be consistent and detailed when it comes to creating an invoice. Don’t wing it.

Like all record keeping — making sure your invoices are accurate is important for your business’ survival. Each item on an invoice can impact your cash flow since you want to be paid the correct amount in a timely manner. It impacts your cash flow and if you leverage your accounting system, it can save you time and money, thus making your more productive. Companies known for inaccurate invoices will not stay in business very long. For example, you need to get paid so you can keep your business running! And if you overcharge your vendors, they probably will not want to do business with you very long. Also most companies require an invoice in order to pay another company. 

Today, most invoices are sent electronically.

In the On-Demand Economy, however, companies might just ask your to go to a website and fill in some information which often is just confirming your hours and your percentage of the profits. If this is the case, you should still keep track of your hours on your own. I repeat. Keep track of your hours. Even if it is in a spreadsheet.

But not every On-Demand company is ‘hooked up’ — or set up to easily record hours.

Your invoice provides a branding opportunity and also represents your company’s approach to business: Does the invoice look professional, is it sent in a timely manner (some companies want to be invoiced on time), etc.

Key elements of your invoice include:

  1. Your Logo (Opportunity to brand and also make it easy for the person to find it)
  2. Name
  3. Company name if you re incorporated
  4. Title
  5. Address (street, city and state)
  6. Phone
  7. Email
  8. Purchase Order number (probably not applicable with the Ubers of the world)
  9. Invoice Date and Number (if applicable).Pick a number that includes vendor number and the actual invoice number. For example 1001-0003 might indicate that 10001 is the vendor and 0003 is the invoice number for that client.. You might even consider adding the date to the invoice, so based on the above, the invoice number would be 1001-0003-5123015 (for May 12th 2015). If you ever get audited by the IRS, an organized system with the proper numbering system will give the IRS more confidence that you have reported your income accurately. You don’t want to create any doubt with the IRS. You can read more @ http://www.ehow.com/about_6509697_invoices-important-business_.html
  10. Services rendered or performed
  11. Date Range for services performed
  12. Hours worked (Unless you are paid by project)
  13. Total amount owed
  14. Total Amount for your service amount
  15. When it is due: Net 30 or Net 45 or Net 60 is common (Include a Penalty indicator if the invoice is not paid on due date, such as you will charge 5% if it is not paid but a specific date. Increase the penalty amount over time.
  16. Payment Method. I like Paypal because it is used by many people, is easy to access, integrates into tax related software programs and creates decent reports.
  17. Contact name and address for the person and company that hired you.

Copies of all invoices should be kept somewhere safe and backed up!