In 1938, Congress passed the Fair Labor Standards Act, which eliminated brutally long work days and ushered in the 9 to 5 workday. Today’s work world is dramatically different, with almost half of today’s workers freelancing or self-employed. According to CNN Money, the gig economy currently comprises 34 percent of the workforce and is expected to grow to 43 percent by next year. Many of these workers come from more traditional jobs. Therefore, there is less familiarity with how to prepare and budget for taxes.
Here are the basic facts about what self-employed workers need to know in order not to be hit with a massive tax bill or penalties. Of course, there are many different situations, so it is strongly recommended that anyone working as part of the gig economy workforce speak with an accountant to make sure there is a clear understanding of the tax obligations, deductions and timing.
What Types of Taxes Are Gig Economy Workers Subject To?
How you set up your business will ultimately determine the specific tax implications. Here are the types of taxes self-employed workers should be aware of:
• Self-employment Tax (FICA/Medicare Tax)
According to the IRS, gig economy workers are self-employed, which means they are subject to the self-employment tax. This is a combination of Social Security and Medicare taxes.
• Federal Income Tax
This is no different than the tax you pay at a corporate job. The Federal Government still gets their piece. The amount will vary based on your income and the expenses, deductions and allowances that are taken.
• State Tax
Most states and municipalities require you to pay taxes on your income, make quarterly estimated taxes, and pay any number of other taxes (sales taxes, business privilege taxes, employer taxes) on your combined earnings.
What Can Gig Economy Workers Deduct?
The more deductions self-employed workers can claim, the lower the taxable income. One common deduction is for a home office. Other deductions include business equipment, supplies, repairs and a portion of utilities and insurance. Additional deductions include phone costs, (though only for a percentage of the time that the phone is used for business), car, mileage, travel, software, supplies, marketing expenses, subscriptions, up to 50% of business meals and memberships to professional organizations like networking groups.
In addition to these deductions, the 2017 Tax Cuts and Jobs Act introduced the Qualified Business Income Deduction, which allows you to automatically deduct up to 20 percent of your net income off the top, up to a certain threshold. You are eligible for this deduction if your income is below $157,500 if filing single or $315,000 if you are married filing jointly (you may qualify for the deduction under special circumstances if your net income exceeds these amounts). The deduction is based on your qualified business income, which is the net income from your business, then calculated after subtracting all of your regular business expenses. In order to receive the deduction, you will need to have a positive taxable income after deducting all of your expenses from your income, including the standard deduction. In addition, your qualified business income deduction can’t be more than 20 percent of your taxable income.
If you think you’ll owe more than $1,000 in taxes for the year, you must pay quarterly estimated taxes. Since a payment is made every few months without knowing the total annual income, it can be difficult to know exactly how much to pay. We tell our clients to pay 25 percent to 30 percent of the annual profits. This will avoid penalties for underpayment.
What Tax Form Do Gig Economy Workers Use?
You might be used to the yearly W-2 form if you came out of a corporate job. Instead of that form, you’ll now receive a 1099 form from any job that pays you more than $600. Even if you don’t receive a 1099 for whatever reason, you still must report all income. If you’re a sole proprietor, a member of a partnership, or have an LLC, you’ll file a Schedule C with your Form 1040 personal tax return.
In order to deduct business expenses it is essential that you track them in order to support their deduction. Upon audit, any tax authority will disallow unsubstantiated deductions. We strongly advise that you keep a log of expenses including miles driven on business and related expenses if you use an automobile or truck in your business. It may also be advisable to open up a separate bank account just for business purposes and also only use a corporate credit card for the same reason. If you also utilize an office in the home please note there are specific requirements related to the deduction of related expenses and the IRS will require you to complete Form 8829.
Have more questions about your taxes? Contact us at email@example.com for more information.
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