Self-Employed Must Plan their Taxes Better | DCR Workforce Blog

Self-Employed Must Plan their Taxes Better

Jobs have taken on a new definition in the gig and sharing economy as freelancing jobs allow one to earn extra income by walking a dog or sharing a home! The operative word here is “income” and the Internal Revenue Service (IRS) expects all income to be declared and the taxes to be paid, including from freelancer or independent contractor work. As the authorities get ready to measure the size of the gig economy, which is pegged by some studies at 54 million Americans, self-employed workers must gear up to pay their dues to Uncle Sam, if they’re not already doing so! Depending on their tax bracket, this could be up to 30% of their income from the gig.

Be a business owner not a hobbyist

As a freelancer, you need to think of your work not as a hobby but as a company with operations, and yourself as a business owner. You need to file your income tax using the 1099-K form, whether you receive notice of it from your client or not. You may have to take the initiative to ask everyone from whom you received an income for a 1099 form by February of every year. To do this, you’ll need to track all income and expenses. It always helps to have a record of all transactions, even when your income is too low to attract taxation.

Begin with this great resource provided by the IRS to research on what is expected of you. Here are some more tips on managing this task:

  • Set up a separate bank account or credit card account for your business, through which all the ordinary and necessary business expenses are paid and business income received. This will help you work out your business profit. Make sure that you keep all personal expenses separate from this account – like when you are working as a driver in the sharing economy. The cost of gas, insurance and maintenance will be counted as business expenses, but not if you drove around on personal errands.
  • Once your gig proves profitable, prepare to pay self-employment tax at 15.3 percent of your income toward federal Social Security and Medicare taxes. Remember 50% of this is deductible.
  • Some general expenses that qualify for deductions include capital expenses; office supplies; phone/internet bills; website design and management; professional dues; travel and lodging expenses; auto mileage reimbursement (for which you do need to maintain a mileage log); professional development training fees; licenses; and 50 percent of the cost of all meals and entertainment associated with your business can be deducted. If using a part of your home as an office on a regular basis and in a dedicated manner, the housing costs for that portion may be deducted as business expenses at $5 per square foot up to an area of 300 square feet.
  • Your business may have some unique expenses which are not covered in the list above. If in doubt, get the help of a seasoned tax professional to decide which of your business expenses are deductible, and which set of tax forms will be applicable to you. Once you understand the bookkeeping methods, you may take over and do it yourself in subsequent years.
  • Calculate your taxes for every quarter and pay them quarterly as this is what the IRS expects you to do and may charge you fees and penalties for failing to do so and paying one lump sum in April. Anyway, handling three months’ worth of income and expenses will prove a less daunting task in any case.
  • Note that any self-employed person who earns at least $400 annually through contract work is required to pay self-employment tax on that income, covering Social Security and Medicare taxes.
  • Play by the rules and be honest with the IRS in reporting your freelance income, to help avoid an audit and the penalties that may follow.
  • Obtain a retirement plan and save on taxes while securing your future.
  • Unless you have health coverage from a family member, purchase insurance (without which you will pay a penalty later). Check to see if you are eligible for a tax credit when buying health insurance.

If your income is high, you may consider incorporating as a formal business entity and get limited liability while saving more on taxes and that will take you right out of the need to pay taxes as a self-employed worker. In all cases, take positive action and avoid coming under the radar of the IRS and its audit!

If you’re self-employed, do you do your taxes yourself or hire a professional?


Disclaimer:
The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.