If you can, find one or more prior years’ tax returns to use as a guide.
Collect all the records first; chances are everything you need is clearly marked.
Call in all payments and pay all debts before doing taxes, and get tax forms from clients.
The actual tax return will be the same as any other income tax. Make sure you account for all of your loved one's potential deductions.
Debts and payments are probably one of the furthest things from your mind after a person you love has passed. It’s an emotional time, and itemized paperwork is a far cry from the sentimental memories you treasure about the person. Unfortunately, the executor of an estate does have to sift through paperwork like taxes—which can be even more complex if your loved one was a sole proprietor, freelancer, or contractor.
The good news is that people who run their own businesses are usually organized by necessity, so once you locate their records, it’s just a matter of understanding their system.
Being a freelancer normally means tracking projects, finances, expenses, and debts very closely. Because taxes are always a little more complicated for those who work for themselves, they tend to save everything.
Once you get access to their records (most likely on their computers and email accounts, as well as possibly on a scheduling software account), look for folders labeled “invoices,” “receipts,” and/or “payments to be made.” You will also want to look for business connections in their contacts, like other subcontractors they might have hired to help them with projects.
It can be helpful to start organizing their work by the projects they did in the calendar year prior to their passing. Those invoices and debts will be the ones that matter for your final income tax filings.
You might also look through their records to find out if they had a tax professional help them in the past. If so, that person might be a shortcut for guiding you through your loved one’s finances.
After locating the records you need, your next step will be to collect on any outstanding payments. If the person used a freelancing tool (such as Upwork or another large outsourcing platform), there will be specific instructions available on its website. For example, Upwork requires a death certificate, a copy of the will with the executor named, a letter stating you’d like to close their account, and a copy of your ID.
However, it’s more likely that your loved one sourced work on their own and worked with clients directly. In this case, you should connect with their contact (i.e. the person they invoiced) and notify them of your loved one’s passing. Keep in mind that anyone who they worked with had a relationship with them, potentially a very close one, so these might be emotional conversations at first.
Once the initial news has been delivered, ask the person what they need to close out any outstanding invoices. You’ll want to offer to send along a death certificate and proof that you’re the executor, along with the invoices themselves. Be prepared to provide them with the financial information for the estate account, which is where the funds should go.
Keep in mind that anyone who they worked with had a relationship with them, so these might be emotional conversations at first.
Depending on how the person or company was handling the financial side of things, you might be sent a form labeled 1099-NEC, 1099-MISC, or 1099-K.
While somewhat more unlikely, it’s possible that your loved one worked with other contractors or vendors and was responsible for paying their invoices. If you find evidence of outgoing payments for any current projects, this is a good indicator that your loved one might owe someone for already completed work.
As with contacting people who your loved one worked for, contacting people who reported to them can be emotional. Give everyone time to process before you jump right into business. When it is appropriate, ask the person or company for a final invoice for any outstanding projects.
In addition, depending on the kind of work your loved one did, there may be vendors they purchased raw materials or other supplies or services from. Make sure to look for any unpaid bills or invoices from such vendors as well.
Unlike with collecting payments, you do not want to settle these accounts right away. These become debts owed by the estate and should be included as such in the estate’s valuation. Once you get the green light from a probate judge, you can start settling these debts out of the estate account. If an account legally needs to be settled before this happens (usually because of a signed contract with a set end date), you can present the situation to the probate court and it will be handled accordingly.
The final income tax is part of settling every estate—it just might be a little more in-depth of a process if your loved one was a freelancer. If you can, it will usually be helpful to find one or more tax returns from prior years for you to reference.
The actual filing will be similar to doing taxes for yourself, collecting the forms you need (usually 1099s in this case) and cataloging expenses. First, you want to report the total income your loved one earned between the beginning of the calendar year and the day of their death. This will be the total of all the invoices they collected, any 1099 forms from income collected, and any accruals from savings or investments before their death. It’s important to note that this can be complicated: Accruals can sometimes continue on these accounts after the person has passed because the agencies are not notified of the death in a timely manner. When this happens, the new owner can be responsible for paying taxes on some, if not all, of the interest accrued.
You’ll also want to report any deductions your loved one might be able to claim. This is where looking at a past return can help because you can see utilities, supplies, and other aspects of working for one’s self that qualify. If you found any organizational elements like “receipts” or “write-offs,” those will most likely be calculated in the deductions. This is another part of the process where a tax professional might be able to help you tackle the process.
It might seem like a lot of work and sorting through documents, but filing the final income tax correctly is a very important part of closing the estate. You certainly do not want to deal with an audit after the estate account has been closed. Take your time in collecting all the info you need, stay organized, and reach out for professional help if you need it ●
Taxes can sound scary, but the truth is that in the vast majority of cases, paying taxes for your loved one and their estate is really very simple. There are several different kinds of taxes you will want to be aware of, however. Detailed information on each can be found right here.