Whether you’re an Uber driver or a financial consultant, a private fitness trainer or a freelance graphics designer, you’re part of the expanding gig economy. As a self-employed person, you essentially have your own business. With that comes the responsibility of paying taxes. Here’s everything in a nutshell you need to know about tax planning in the gig economy.

Note that the taxes you owe and how you file them may depend on the structure of your business. There are fundamental differences in the way a sole proprietorship, an LLC, and a corporation pay and file taxes. Consult with a knowledgeable accountant regarding the business structure that’s best for you and how best to deal with your tax obligations.

Taxes You Owe

No matter your business structure, you pay income taxes on your net earnings. Net earnings are your gross profits minus any allowable expenses you claim. Naturally, you pay federal income taxes and, in most states, some level of state income taxes. Most local tax authorities also collect tax on income.

If you worked for somebody else before starting your business, you were lucky in that your employer paid half the FICA (Social Security/Medicare) taxes. As a self-employed individual, you must pay the full share of this, 15.3 percent of your net income.

Depending on where you live, you may also be required to pay other state or local taxes, such as sales tax (if you sell a product or provide certain services), employee privilege taxes, or payroll expense taxes. Local authorities are especially good at figuring out ways to carve taxes out of your income.

Estimated Tax Payments

The IRS and most state and local governments require you to make quarterly estimated tax payments on your income. Make sure you set aside approximately 25 to 30 percent of your income each quarter to pay these taxes. If you don’t pay, you may be subject to penalties and interest. You might also trigger an audit, a hassle you really don’t want.

Expenses You Can Claim

To offset the taxes you owe, you want to claim as many allowable expenses as you can. Note that, since you are likely filing income taxes for your business through your personal income tax forms, there’s a distinction between business expenses and personal deductions. Because of the new tax law, most earners will take advantage of the higher standard deduction. But that doesn’t mean you can’t still deduct every business expense the IRS allows.

Here are some of the deductions you may be able to take as a self-employed individual:

  • Home office expenses (including a portion of your utilities, insurance, etc.)
  • Business equipment (computers, printers, business portion of cellphone, etc.)
  • Office supplies (software, paper, pens, etc.)
  • Transportation expenses/mileage (at the federal rate)
  • Subscriptions and memberships to professional organizations
  • Marketing and advertising
  • Payment processing fees (as from PayPal)
  • Gig marketplace fees
  • Other costs incurred in providing a service

Make sure you document all your deductions with receipts and detailed records. The IRS requires it.

Investing for Retirement

Now that you’re working on your own, don’t forget about planning for your retirement. Contribute some of your earnings to a retirement plan, such as a SEP-IRA or Roth IRA. Importantly, cash you throw into some retirement accounts (with certain limits) is deductible from your income taxes.

Filing Year-end Tax Forms

Make sure that you file your year-end income and other tax returns accurately and on time. If you’re not sure about certain parts of the tax code, take advantage of the expertise an accountant can offer you. Accountants can not only help you in filing tax forms and paying the right amount of tax, but they can often advise you on other aspects of your business.

SOURCE1800 Accountant
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1800Accountant is a national accounting firm that assists small and new businesses in all 50 states, Canada, Australia and the UK. Our mission is to provide small businesses with affordable accounting and tax preparation services. Our experienced team of over 100 in house tax professionals is ready to start working for your business today. Call for a free consultation.

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