Tax prep for GIG WORKERS
Tax season has begun for millions of workers across the country, and many returns will be filed by members of the growing gig economy. Gig workers now make up 36% of the workforce, according to Gallup. These workers, who toil as artists, freelance writers, consultants, food delivery people, dog walkers, ride-share drivers and more, likely can expect a more complex tax season than those who work as employees of a company.
The Internal Revenue Service considers freelancers to be self-employed, so they must file taxes as a business owner. These workers can take additional deductions if they are self-employed, but they will also face additional taxes in the form of the self-employment tax, TurboTax notes. There also are quarterly estimated tax payments to consider. Anyone who has net earnings of at least $400 through their gig work is required to file a tax return.
For freelance workers, especially those who do their taxes without a tax preparer's help, filing taxes can be confusing. The IRS this month launched a Gig Economy Tax Center site (irs.gov/ businesses/gig-economytax-center) to deal with the questions that have sprung up around gig work.
A report from the IRS on the tax gap between 2011 and 2013 found that the gross tax gap (the difference between the taxes that taxpayers should pay and what they actually pay on a timely basis) for that time period was $441 billion. Under-reporting and underpayment accounted for 80% and 11% of the tax gap, respectively, and non-filing accounted for 9% of the gross tax gap, among all groups.
These errors can lead to penalties that are especially rough for gig workers, who often are pressed for time and money.
Fortunately for gig workers who find tax season daunting, there are many CPAs who specialize in such work, including Amy Northard, CPA and the founder of The Accountants for Creatives, and Hannah Cole, an artist and the founder of Sunlight Tax.
Northard and Cole have worked with creative people, including gig workers in dance, art photography and writing. If you're a freelancer struggling with the tax rules, here are some of their tips for avoiding errors. |
Northard: If people are using PayPal or Stripe or Square ... (sometimes) they will only count the income that gets deposited into their checking account as a sale and they don't factor in the fact that fees were already taken out. So, if someone sells something for $100 and they get $95 deposited, they would only report $95 as income, but they would instead want to do $100 of income and then $5 of expenses. That kind of thing can cause the IRS to reach out to you with a letter, which no one likes to have happen. So you really want to make sure you report it with the income and expense separately.
Cole: If an audit got really hairy, they could actually compel you to show them your books and you'd want to make sure you had them . ... The IRS doesn't really care if you miss a whole bunch of expenses because essentially it means you're overpaying your taxes, but I don't want people to overpay their taxes. I want people to know that they are allowed to take a mileage deduction for visiting clients or doing site visits … or meals deductions for meeting with those clients or people that they work with and there's lots of things that if you don't track it you don't get to expense.
Cole: Basically, from an IRS perspective, the minute you start earning a dollar as a freelancer, you're a business and you, in fact, must behave like a business in order to get the benefits of being a business, tax-wise. You have to have bookkeeping, and you (also) have to track your expenses and your income. … I think a lot of us start earning money, but we are kind of coming from a perspective of making a career in the arts, so we'll tend to not think of ourselves as a business right off the bat.
Northard: We always recommend that people completely separate everything from their business from their personal account because it just makes the bookkeeping so much easier. … Be careful about counting owner's payments or payments to (yourself ) as a business expense. In most cases that's incorrect. ... If you're just transferring money from your business to yourself, then it's just called an owner's distribution … and not considered a business expense. The reason that can really mess people up is if you're looking at your profit to determine how much tax to save, if you think that you only have to pay tax on whatever's left after you take the money out, then it's going to be way different than when you look at the correct number.
Cole: Self-employment tax is where I see mistakes that are in the thousands and tens of thousands of dollars. Basically, all the money that you earn as a freelancer gets reported on what's called a Schedule C and all the money on a Schedule C is not just subject to income tax, it's also subject to self-employment tax, which is a flat 15.3%. So, you might have it in your head that you're in the 20% income bracket ... but you rarely are also putting on that 15.3%, so ... someone in the 20% bracket is really owing 35.3%. ... Setting aside that money or paying in estimated quarterly taxes is what you have to do to take care of that . ... Usually the way people find out about it is an enormous tax bill they didn't expect.