Gig workers should avoid these 5 common tax missteps

Millions have joined the gig economy — 41 million, by the latest count.

While working for Uber or striking out as a freelancer can bring benefits such as flexible hours, there’s a downside: taxes.

That’s because paying the tax man as a gig worker isn’t as simple as for employees, whose bosses withhold taxes from their paychecks. Self-employed workers are on the hook for making sure they’ve set aside enough money to pay the IRS and their state tax agency.

Failing to do so is a common mistake, Northwestern Mutual wealth management adviser Chantel Bonneau says. The IRS says independent workers who expect to pay at least $1,000 in taxes on their gig income should make quarterly estimated tax payments.

“Many, many smart and very thoughtful people that have gig income have this situation,” she said. “They meet with their CPA and find out they owe $9,000.”

Budgeting for taxes is essential not only for avoiding an unexpected tax bill, but to sidestep IRS penalties for failing to make those quarterly tax payments, says Gene Zaino, CEO of MBO Partners, a business services company that specializes in self-employed workers.

Five mistakes independent workers should avoid in 2018:

❚ Missing quarterly estimated tax payments: Gig workers sometimes aren’t aware they are on the hook for quarterly tax payments to the IRS and their state. A tax expert or tax-prep software program can set up those payments, which for federal 2018 taxes are due April 17, June 15, Sept. 15 and Jan. 15.

Gig income can fluctuate month to month, which is why some freelancers find this challenging. The IRS offers the option of annualizing your income, which allows you to make unequal payments, say if your business pulls in most of its income over the holidays, says Lisa Greene-Lewis, a CPA and tax expert with TurboTax.

❚ Ignoring deductions: One of the most common mistakes of self-employed workers is failing to take all the deductions available to them, Greene-Lewis says. A few of those items include start-up expenses, marketing spending, business mileage and home-office costs. A CPA or a tax-prep software program can help you find which deductions are applicable to your business.

Some self-employed workers worry taking a home-office deduction will trigger an IRS audit, but Greene-Lewis calls that a misconception. “As long as you are not claiming extravagant expenses, you should be fine,” she says.

❚ Skipping retirement contributions: Don’t forget to plan for your retirement, which not only sets you up for your golden years but may help lower your current tax liability, Bonneau says. Taxpayers have until the filing deadline — which this year is April 17 — to make contributions to their IRAs. Some gig economy workers may want to consider a SEP-IRA because they typically have higher contribution limits than other IRAs, Bonneau adds. “Gig workers need to realize they deserve having a real retirement plan,” she says.

❚ Not planning for the new tax brackets: The tax bill signed into law late last year by President Trump lowers the tax rates for most taxpayers by between 1% to 3%, Greene-Lewis says.

Because of that, self-employed workers should sit down with their accountant or work with a tax program to assess how the lower tax brackets will impact their tax situation and their quarterly estimated tax payments.

❚ Failing to research the passthrough deduction: The new tax bill gives what some tax experts consider to be a huge benefit to self-employed workers: a new tax deduction of 20% of income. However, Zaino cautions the IRS hasn’t yet provided guidance on who exactly can claim it.

Self-employed workers should start researching the pass-through deduction, but keep in mind that questions about the regulation will remain until the IRS issues its new guidelines.

“For 2018, I would do as much research as you can,” Zaino said.