Depending on your sources of income, tracking for tax purposes may be handled by your employers or all on you.
If you’re lucky enough to get a W-2 from your primary employer and you have free-lance, contract work or rental income on the side, check your tax withholding status at your full time job. If at all possible, bump up your withholding amount to protect you from paying penalties on the contract work.
However, if all of your income is contract work, paid out on a per job basis, or based on rental income, track your income. You might consider getting an EIN, or Employer Identification Number, and setting up an additional bank account. Even if you never plan to have employees, this number will enable you to name your business. For tax purposes, you can run income paid to this business account on a federal Schedule C through your 1040. Review the tax laws in your particular state to guarantee that you are not omitting tax laws in the states you work in. At the end of the calendar year, your bank statements will provide you with detailed history of your income.
Once a month, compare your year to date income for the current year to the same dates of last year. If you notice a bump in income, it may be time to consider making an estimated payment to avoid a large tax bill in the spring or any penalties that may be assessed.
If you have business expenses related to different projects or rental properties, track them by project or by address. This can easily be done with a vinyl file portfolio, labeled by specific project. For example, if a rental property needs a repair or a service technician needs to work on an issue, keep that invoice tied to the address so you can track that deduction on your 1040 tax return. If you do your own work, save all sales slips, invoices and cash register receipts in this same fashion. Once you sit down to fill out your tax return, each project and the expenses tied to it can be quickly tabulated. Doing this as soon as you pull the receipt out of your pocket can save you a cumbersome and messy project.
Cash payments are a special challenge for free-lancers and contract workers. If and when possible, route this income through your dedicated bank account. It may seem like an extra step, but carefully tracking your income in any format is a good habit to get into, and may save you a lot of stress and worry in the future.