Make smart money moves to minimize your tax burden.
While this segment continues to grow because of the flexibility and freedom involved, people in this group do face financial challenges. Those challenges often start and end with taxes. The tax filing process is much different than that of traditional workers. It can lead to shock for gig newbies who aren’t aware of tax laws for this way of working.
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1. Get your 1099s from all clients that paid you more than $600 during the taxable year
Your clients should have mailed or sent digital access to your 1099 by January 31st. But, you may run into a few that don’t adhere to the regulations about reporting freelance or gig worker income. If that’s the case, request your 1099 in writing.
Many startup founders and smaller business owners may not realize they must provide you a 1099 form. If you don’t get one, it doesn’t mean you are off the hook for reporting that income. Most likely, you received that income through PayPal, Venmo, or a bank account, which means the IRS can locate that money should they ever audit you.
Even if it takes some time to go through invoices or payment records to calculate the amounts, you’re better off reporting that freelance/gig income now than paying for it later. Not reporting this income and getting audited can mean paying taxes and penalties on that money.
2. Include all your taxable income and expenses on Schedule C of your personal 1040 form if you’re a sole proprietor.
If you’re a freelancer or gig worker, you’re probably a sole proprietor. You should list your taxable income and expenses on Schedule C of your 1040 form. It’s fairly straightforward to fill out the Schedule C form with the various income and expense amounts you need to report.
If you’ve incorporated your freelance business, then your tax reporting will be different. In this case, or if you’re still unsure what to do as a sole proprietor, it’s highly recommended you hire a tax professional to do your taxes.
3. Collect all your receipts and account for all deductible expenses
As a self-employed individual, you’re only taxed on what is left over after you deduct expenses. That’s a compelling reason to keep good records and save all receipts. To be better organized and not miss out on any deductions, you might even consider a receipt app so you can take a picture of receipts and store them in the cloud.
There are many types of expenses you can deduct as a freelancer or gig worker. These expenses include gig/freelance marketplace membership fees as well as payment processing fees like those charged by PayPal or a credit card company. You can also deduct exchange rate fees, software and subscriptions, and office equipment.
Your home office deduction may often be your largest deduction. If you use a room in your home exclusively for business, you can claim some expenses like a percentage of utilities and mortgage insurance as part of your tax deductions. Don’t forget to also include charitable donations, marketing/advertising costs, and insurance.
4. Whether you run a sole proprietorship, LLC, or corporation, a CPA can help
As you can see, filing taxes as a gig worker or freelancer gets complicated quickly. For example, let’s say you provide a service like driving for Uber or Lyft or run an Airbnb. Then, your deductible expenses may vary and include things like mileage, maintenance, repairs, and insurance.
With so many options or situations to consider, it’s best to turn to a CPA for professional advice. They can provide guidance for this year’s tax filing as well as how you should plan for future filings.
5. Pay self-employment taxes
In addition to federal income tax, which is paid by all U.S. workers, and state tax, if you live in a state that taxes income, you’ll need to pay self-employment tax.
Self-employment tax is levied on all self-employed earnings after expenses. It consists of Social Security and Medicare taxes for people who work for themselves. The tax rate is just over 15 percent.
This may seem like a considerable chunk of change. However, you can also use what you pay as a tax deduction, which minimizes some of the financial impact.
6. Once you know your estimated taxes for the year, pay those on a quarterly basis
A freelancer or gig worker may need to think beyond paying taxes just one time in April. When you know you’ll make a profit in the coming year, you’ll need to estimate that 25 to 30 percent of that will go to taxes paid across four payments.
Your accountant can calculate these quarterly estimated payments, and can even provide you with payment coupons. The amount is often based on the previous year and what you think you’ll make in the coming year.
If it turns out that you overpay on your estimated tax payments, a refund will be provided as part of your tax filing for the year you prepaid the taxes.
7. Create financial goals that let you open and contribute to retirement accounts that reduce taxable income
Once you file your first tax return as a freelancer or gig worker, it’s important to plan how to reduce your tax burden each year.
Putting money into retirement accounts not only sets you up for a financially sound future, but it also helps reduce the taxable income and profit you report. Explore, open, and manage retirement accounts that allow for tax deductions, including an IRA, 401(k), and SEP-IRA.
Don’t let the IRS drain your accounts! Talk to a certified tax resolution specialist to stop the levy and find a solution to end your problems with tax debt
Published by Debt.com, LLC