December 23, 2020
The gig economy shows no signs of slowing down. As more and more people forego traditional employment to work as freelance writers, Uber drivers, Grubhub delivery people, or Shipt grocery shoppers, an entirely new class of workers – called gig workers, because they move from one small job to another – has been created and is booming. But with this new class comes a number of tax-related issues.
Since the gig employees are solely responsible for paying all of the taxes related to their income, as their employers (if you can even use that term, since the workers are beholden to no one) do not take any taxes out of their payments, a number of issues can arise. For example, 70% of all independent contractors, or gig workers, did not deduct any expenses on their tax returns. As a result, they pay 21% more taxes than they should. In order to solve this problem and provide some tax relief, we have put together the top five tax tips for gig economy workers.
1) Keep Excellent Records
Since many gig workers often have more than one gig, delivering restaurant meals in the afternoons and evenings and making grocery and Uber runs during the day, it’s important to keep extremely accurate records of how much you’ve earned and which company has paid you said funds. While you may get a 1099 from them at the end of the year, you’ll still need your own records to back up that information. Track your income on a spreadsheet and save any paper paystubs or notices in an envelope. Speaking of saving records and tracking income, you’ll also want to track all of your expenses. Your car’s mileage, any gas used, your home office equipment, your cell phone, and other things, as they may be deductible come tax time. You simply need to track everything, save every receipt, and then check with a tax professional in order to put together your yearly tax return. In addition, if you’ve made any estimated tax payments, track those as well.
2) Make Estimated Tax Payments
Small businesses often make estimated tax payments on a quarterly basis. This prevents them from having a large tax bill at the end of the fiscal year. As an independent contractor, you can do the same. Reference your records, and make sure to estimate how much you may owe in taxes, then fill out the form and make that payment. The IRS will not penalize you for doing this. Instead, they like it when a gig worker takes the initiative to stay on top of their taxes. Remember that when the end of the year rolls around, if your estimated payments were too high, you may end up not owing any additional money to the IRS. They’ll take the estimated amounts, add them together and use that to clear up the amount due according to your end of year tax return.
3) Don’t Forget Your Deductions
You may have heard scary tales about the IRS coming down hard on people who have made certain deductions on their tax returns. Things like “they’ll audit anyone who deducts office expenses” tend to fill the echo chamber. However, keep in mind that an audit isn’t as scary as it sounds (many of the smaller ones take place via mail, where you send the IRS the information that you have so they can review it), and as long as you have the receipts and can prove the expenses you claimed, you won’t have anything to worry about. Deductions help you more than they can hurt because after you subtract them, you’ll end up owing a smaller amount in taxes. So, don’t let those scary second-hand rumors prevent you from saving as much money on your taxes as possible.
4) File Your Tax Returns On Time
Many gig workers don’t think that they need to file their tax returns, or if they do, they file late. Both can lead to penalties, interest, and even tax liens, as the IRS wants you to get those returns in on time. If you fail to file altogether, then the IRS will estimate how much you’ve made, using the information provided to them by your gig employers. As a result, you may end up owing more than you should, due to the lack of deductions. So, remember to always file your tax returns on time.
5) Consult a Tax Professional
Being a gig worker is like owning your own business. Small business owners have accountants or at least tax professionals who handle their taxes for them. A good tax professional can answer any questions that you may have, prevent you from filing late, stop you from deducting personal expenses, and help you find as many deductions as possible. As a result, the amount that you pay the tax professional will pale in comparison to the savings that you can net. It’s always a good idea to work with someone who has plenty of experience in preparing and filing tax returns for independent contractors and small businesses.
If you have questions about filing tax returns as a gig economy worker or If you have questions about filing tax returns as a gig economy worker or independent contractor, contact us. The tax advisors at Enterprise Consultants Group can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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