Gig economy jobs are more popular now than ever before. Several digital platforms, like Uber, UpWork, and Fiverr exist to allow people to make money by completing projects on demand. For this reason, taxpayers are finding it easier than ever to work for themselves. But, with the freedom of working in the gig economy comes the responsibility of handling gig worker taxes.
Independent contractors, in the eyes of the IRS, are business owners. They must follow extra IRS tax rules and understand how to report sales tax, payments to the contractors, quarterly estimated tax payments, and state and local licensing requirements.
Tax Saving Tips for Gig Workers
You don’t always know when you will get paid with gig work. But because your next paycheck is unpredictable, this does not mean your tax situation needs to be.
Pay Your Taxes Quarterly
If you are new to the gig economy, you may be surprised to learn that self-employed people pay their taxes every quarter instead of once a year, like most workers. When you are employed by a company, your employer withholds the taxes for you. As a self-employed person, that’s your job. As such, you have to pay for Medicare and Social Security yourself. You also have to pay taxes that your employer would otherwise have paid. This means that a percentage of your earnings as a gig worker should be allocated to Uncle Sam.
Maximize Your Deductions
The best thing you can do to save money as a self-employed person is to understand which of your expenses are tax deductible so that you can cash in on them. Of course, you should only deduct business-related expenses, but if you understand IRS gig economy taxes and apply legitimate deductions, it can save you money.
Common deductions include the following:
• Wages and salaries. This includes commissions, bonuses, and fringe benefits you pay for outsourced services.
• Vehicle expenses. These include operating, maintaining, fueling, and repairing your vehicle when used for business.
• Contractors. Most small businesses will use independent contractors to meet their labor needs. This is always tax-deductible.
• Supplies. These include computers, technology, and other items used to run your business. In most cases, these are fully tax-deductible.
• Rent. This can be office space, storefront, or other facilities.
• Insurance. Your business owner’s policy, flood insurance, cyber litigation coverage, and insurance for your business vehicle are entirely deductible.
• Advertising. Websites, flyers, radio announcements, and social media marketing are fully deductible if they are ordinary and required for your type of work.
• Meals. As a freelancer, you can deduct the cost of meals if you work away from home on business overnight. You need to keep track of the money spent or use per diem meals.
Home Office Expense Calculations for Gig Workers
If you’re using a section of your home as your office, you could be eligible for home office expenses. You can calculate your home office expenses via the standard or simplified method.
Since 2013, the simplified option lets you deduct five dollars per square foot of office space. If your office occupies 100 ft.², you can deduct $500. The maximum is 300 ft.², meaning you can deduct up to $1,500.
There are some limitations. For example, the space can only be used for business purposes, and it must be your primary workplace that’s used regularly. However, when done accurately, home office expenses can save you a considerable amount on your taxes.
How Can Accounting Software Help Gig Workers?
A freelancer or gig worker is the same as a business owner to the IRS. Specifically, you are a sole proprietor. You’ll need to report your income and expenses using Schedule C. Schedule SE will be used for your self-employment tax.
With all the complications of filing taxes and keeping track of deductions, you want accounting software designed for freelancers. It needs to be easy to use but powerful enough to give you the functionality you need to run your business efficiently. Software should make it easy to keep track of deductions, pay your quarterly taxes, and file your taxes seamlessly at the end of the year.
At Fusion CPA, we have years of experience working with freelancers and understanding the best software setup for handling gig worker taxes. Our team of CPAs stands ready to provide general accounting, bookkeeping, and tax planning advice and will guide you to the right accounting software for your needs. Contact us to learn more.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.