So you’re thinking of joining (or perhaps have already joined) the growing population of “gig” workers. A gig worker is in essence a freelancer or self-employed independent contractor. Freelancers make money pretax, which means that they are solely responsible for tracking and reporting their income during the tax year. By January 31 of the next year they will receive what’s known as a 1099-NEC (non-employee compensation) that reports to the freelancer and to the IRS any amounts of money earned from their gig work of $600 or more during the previous year.
If you’re a first-time gig worker, you may not know one of the most important tips is to set aside money for taxes. Just like being a W-2 employee you will have to pay federal and state income tax and the employee portion of social security taxes on the money you earn. But instead of your employer withholding these taxes from your paycheck, your income will be fully reported with no taxes taken out. And not only federal and state income tax but both the employer AND employee portion of social security and Medicare. Suddenly when you file your tax return, you may be faced with a huge tax liability.
What should you do? If you’re just starting out, the rule of thumb is to set aside 30% (25% for federal income tax and social security/Medicare taxes and 5% for state income tax) in a checking or savings account to be used solely for paying taxes April 15. As your business grows you may find it advantageous to pay quarterly estimated taxes which are due April 15, June 15, September 15 and January 15 of the following year.
That’s a whole lot of taxes, you say. What can I do to lower the amount? Running a business requires overhead expenses that you may be able to deduct from your taxes. Unlike personal income tax, there is no standard deduction for business expenses. You have to track and itemize everything manually. Accordingly, you should follow the IRS guidelines for itemized business expenses closely. Here are the most common deductions. Phone and internet, Business/office supplies, Continuing education, Licenses, Mileage, Home office deduction. We’ll explore good accounting practices for your business in an upcoming blog.
Contributing blogger, Sue Bean, CPA Sue A. Bean is a Certified Public Accountant with over 30 years experience in both public and private industry. She has had her own small business advisory and tax practice since 2009. Her passion is working with small business start-ups to ensure they get off on the right path to compliance with legal and tax laws and profitability for the owner. She can be reached at: firstname.lastname@example.org