It’s apparent that freelancers increased in numbers for the past twenty years. Like any other worker, the importance of taking care of your finances especially your taxes remains. Whether you’re hustling some small work aside from your regular salaried job or earns income from working on different types of gigs full-time, you must learn how your finances will be affected by the taxes and tax deductions you get every year. Let’s take a quick look at some of the common tax issues for the people working in the Gig Economy.
Unlike full-time workers where Medicare and Social Security taxes are deducted from their paycheck, Gig-economy workers pay those taxes for themselves through self-employment tax. The required rates are 12.4% educated for Social Security and 2.9% for Medicare, both are high since contractors and freelancers are mandated to pay the employer and the employee portions for Social Security and Medicare.
If your net earnings are more than $400 working as a contractor in any given year, you are required to pay income taxes. It’s important that you document your earnings and expenses accurately since you are paying base on your net income. Don’t forget to make the eligible deductions from your taxable income as well.
Are you running a business from a place you rented or on your own home? Take advantage of your expenses by deducting them in your tax return. You only have to follow the IRS guidelines, that is the space must be your main place of business and must only be used solely to your work. This means, if you typically work on your kitchen table where you also cook your meals, you will be able to deduct any costs incurred. The size of your deduction will depend on the percentage of space you’re using.
If you’re using an area to make crafts to sell on a platform such as Etsy, deduct that space as well as that storage space in a garage you’re using. White collar workers aren’t the only ones allowed to claim a home office deduction.
Gig economy workers who use their vehicle to drive for a service like Uber or Lyft can claim for a deduction. Driving your car for business meetings and traveling to meet clients is also eligible. Don’t forget to include them in your tax return because they can help you save some money too.
How do you reduce business expenses associated with using your own car in making some money? There are two options you can choose from.
If your business involves making crafts to sell on Etsy, never forget to deduct ordinary business expenses such as materials and supplies. As long as you're self-employed, you can take this deduction and the cost of tools if that’s relevant.
Submitting your taxes on time is necessary if you’re self-employed to avoid hefty late fees. If your federal tax return is late, you’ll have to pay 5% of the unpaid taxes every month or a portion of those months. Failing to file on the other hand will cost you as much as 25% of taxes.
The truth is, you pay a much lower rate if you file but do not pay on time.
You only have to worry about 0.5% of your unpaid taxes for each month or a partial month after the due date up to 25% of your unpaid taxes. On the other hand, failing to file but paying on time will lead to a minimum penalty of $135 or 100 percent of the unpaid tax. This applies to tax returns filed more than 60 days after the due date or extended date. In other words, filing on time is better even if you don’t know how much taxes you really owe when tax season arrives.
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