I often get asked in January, “How’s tax season going?” “It’s going well,” I say, only because it hasn’t really started for me in terms of 1040s. My staff on the other-hand is frantically trying to get our business clients’ accounting completed through year-end and gather SSNs or EINs for the non-incorporated, non-employees who provided services to our clients last year. I help in picking up the slack.
If it’s getting too close to the end of January my clients will start receiving calls from their contractors requesting 1099s so they can complete their tax return. The funny thing about the 1099-MISC form in terms of reporting contract labor is that just because a self-employed individual has not received a 1099 reporting how much he or she earned, doesn’t mean they can exclude that income from their tax reporting.
The best method for correctly reporting self-employed income and to avoid being dependent upon receiving 1099-MISC forms is to keep a separate business checking account and keep electronic bookkeeping with products such as QuickBooks or Xero, even if you are a self-employed sole proprietor. Make sure all receipts, checks and cash, received for contract or self-employed work is deposited into the business checking account. Business expenses such as tools and supplies should be paid out of the business checking account. When the expenses needed to operate the business have been paid the owner should then transfer the profit from their business checking account to their personal checking account to pay for personal expenses as needed.
The separation of business and personal checking account activity is extremely beneficial when the self-employed taxpayer is audited. This separation of activity combined with monthly bank reconciliations and topped off with electronic bookkeeping are the most important things the self -employed business owner should do for correctly reporting taxable income and surviving an audit. I would bet that the IRS prefers these three steps as opposed to saying “Well, I never received a 1099 so I didn’t include it in income.