Keeping track of business documents seems like an obvious obligation for an independent contractor—because documented proof is the only surefire way to defend against fees and legal claims from the IRS.
Whether you’re keeping track of expenses with a receipt book, spreadsheet, or cash receipts journal, do you know what to keep and how long you should keep it for? When you file taxes as an independent contractor, leaving a paper trail to prove independent contracting work is critical.
Here’s a list of what to keep track of as an independent contractor!
1. Invoices (7 years)
It’s recommended to keep key business ledgers like invoices for seven years, and for good reason, too! It’s the best way to protect your contracted accounts against a conflict with a client project. Invoice statements also verify that you are subject to profits and losses, which is one of the factors in the Twenty Factor Test for an independent contractor. In the event of an IRS audit, these invoices will help prove your status as a contractor.
2. Travel mileage logs (3 years)
Like any good expense tracking habit, keeping travel mileage logs ensures protection against tax audits and business disputes. They can also be used for travel-related tax deductions. There are plenty of travel miles that qualify, including car expenses for business travel to and from airports and hotels, business meals, errands and supply runs, travel to client offices, and to and from business meals.
Regarding car expenses, the gas mileage rate was 62.5 cents per mile for the last 6 months of 2022. The mileage rate for 2023 is 65.5 cents per mile.
3. Business cards (forever)
Being a successful independent contractor requires agile networking skills. At any given moment, there’s a chance that you will stumble across your next great project, partner, or client. Unfortunately, independent contractors collect dozens of business cards every month that are habitually trashed or misplaced. Keeping business cards can help secure relationships, as you never know when one of those contacts will come in handy. Working for multiple clients is also part of the IRS’s Twenty Factor Test, and business cards provide evidence that you are not controlled by a single employer.
4. Service advertisements and listings (forever)
Keeping copies of past service advertisements and listings is yet another easy way to formally and legally prove a contractor-client relationship for independent contractors. The IRS says that making services available to the general public on a regular and consistent basis demonstrates autonomy in the nature of the work. It also confirms your intent of work in the event that a client wants to claim you as an employee rather than a contractor.
5. Project records (7 years)
Independent contractors are required to fill out form 1099-MISC, a detailed document that asks what you made for each individual job. Project documents, including the contract, change orders, correspondence, logs, monthly reports, and schedules provide the specifications and technicalities needed not only to fill out a 1099, but they also provide detailed insight of your contract work to the IRS if your worker classification ever comes into question.
6. Tax returns (3 years)
Due to the IRS statute of limitations, three years from the date of your tax return (or from the date of filing, whichever is later) is typically the standard time to keep business tax returns for tax-related business documents. The statute states that you have three years to file a claim for a refund, and the IRS has three years to appraise a tax if your income was not accurately reported. Even if these two situations don’t apply to you, keeping recent tax records protects you from any doubts that may be raised against your tax filings in the future. (IRS.gov)
Business expenses tracking apps, accounting software or receipt management software is key to having a stress-free tax time.
7. Professional licenses and insurance certificates (forever, or until expiration)
The last item on our list of what to keep track of as an independent contractor are licenses and certificates. Many jobs require contractors to be professionally certified in a given field to complete a client project. Though the regulations vary state-by-state and city-by-city, having these documents on hand and ready to present to a potential employer streamlines the hiring process, increases the probability of getting hired for the job, and may even increase your potential pay. Clients want to know they are legally protected and are hiring the right person for the job—it pays off to gain their trust.
Frequently asked questions about what to keep track of as an independent contractor
How do you file taxes as an independent contractor?
This depends on how you set up your business. As an independent contractor, you’re either:
- Sole proprietors
- A single member LLC
- A single member LLC taxed as an S-corporation
If you fall into one of the two first categories, the forms you file will be exactly the same, and you’ll also be taxed the same as well. So for sole proprietors and single-member LLCs, you’ll file the following forms:
See also: Bookkeeping for LLC: Best Practices and FAQs
How do I fill out Form 1040 for independent contractors?
Form 1040 is a tax form that shows how much money you earned in the past year. You use this form to report your income to the IRS and claim tax deductions or credits. Your tax refund and tax bill are both calculated using information from your tax return. You can file your tax return either electronically using tax software or you can download Form 1040 directly from IRS.gov if you want to do it by hand.
What are the forms you need when hiring an independent contractor?
1. W-9 Form – Request for taxpayer identification number and certification
If you pay an independent contractor more than $600 in taxable income in a given year, you and the contractor need to report this money to the IRS. You will need to get a W-9 form filled by your contractor to acquire their tax and financial information.
2. Work contract between the contractor and your business
A work contract details the business relationship between a contractor and a client. Having a written contract is crucial for being a bookkeeper and for tax purposes.
A work contract is a document that outlines the business relationship between you (employer) and the contractor. This document specifies what the contractor will do for your business, their wage, and payment method. The contract is essential for your business’ bookkeeping and tax purposes. When you hire a contractor, insert the clause stated in the Contractor Code of Business Ethics and Conduct (Nov 2021).
See also: Virtual Bookkeeping Jobs: The Total Guide
3. Form 1099-NEC – Non employee compensation
Form 1099-NEC is a form used to report payments a contractor receives from a non-employer. This form is especially helpful if the payments are not considered compensation by the IRS.
A 1099-NEC is only required if the business has paid a contractor $600 or more for the year. If the contractor’s income is less than $600, they will still need to report it on their taxes. However, if they make less than the minimum income for filing taxes, they don’t have to.
4. Payment information and documentation
Payment information includes invoices, bank statements, and (if applicable) work orders.
Tracking 1099 expenses: How do I keep track of taxes as a 1099 contractor?
When you’re working as a 1099 contractor, there’s a lot to keep track of. In order to get the largest tax break possible, keep a detailed log of all your business expenses so you can report these when the tax season comes.
There are several ways to keep track of your business expenses:
1. Take pictures and keep track of receipts, both digital and physical invoices, credit card statements, office expenses, and other tax deductible purchases.
2. Keep a spreadsheet to track both your income and expenses.
3. Establish an expense tracking process by using a receipt tracking app.
How much should independent contractors be expected to pay in taxes?
This depends on several factors such as which state you stay in or whether you have any kids, but to be safe, if it’s your first contracting year, aim for saving 20 to 30% of your paycheck for taxes.
Start looking into tax deductions and confirm your eligibility for the deductions. Do a good job of tracking your mileage and your business expenses, and you’ll save money in the amount of taxes you’ll need to pay per year when tax time comes around.
Bonus infographic: 7 useful documents every independent contractor should keep
Make sure you don’t lose these important tax documents and you’re protected against new contract work laws by knowing what to keep track of as an independent contractor and saving your documents for secure and easy access.
Shoeboxed offers mail-in services with premium plans, allowing contractors to send in their important documents and never have to worry about being able to find and provide legal supporting documents for their contract work. Focus on working for yourself and doing what you love—we’ll handle the paperwork.
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