By Michael Babikian
The last of the Thanksgiving turkey leftovers are gone, and you’re starting to see more holiday lights blink on in the 5 o’clock hour. We’re down to the last month of the year, and it’s time to think about putting the financial year to bed.
Considering how many Uber and Lyft drivers I see on a daily basis, I thought it would be helpful to offer some tax planning tips for those who work in the gig economy. The gig economy is made up of freelancers, independent contractors, consultants and people who support themselves on a trade. Those who are one of the 16.5 million Americans who the U.S. Bureau of Labor Statistics describes as having an “alternative work arrangement” could have some additional tax planning to do. Keep in mind that the tax code is quite complex. Every situation is different, and I urge you to consult an accountant for advice on your specifics.
What Taxes Do You Owe?
Unlike full-time employees whose employers withhold taxes on their behalf, gig workers must do their own withholding. That means setting aside enough money to pay estimated taxes on a quarterly basis. Gig workers must prepare for three main taxes.
- The self-employment tax (FICA/Medicare)
- Federal income tax
- State tax
Generally speaking, reserving between 25 percent and 30 percent of your profits is enough to cover all three. When you’re ready to pay, the Electronic Federal Tax Payment System website makes it easy to schedule payments. If you want to arrive at a more accurate number, work with your accountant. Just know that, if you overpay, you’ll receive a rebate.
Notice I said profits and not income. As a self-employed individual, a gig worker only pays taxes on profits. And because the gig worker is taxed like a business, the worker can deduct expenses. This is good news because it lowers the sum on which they’re taxed. Profit is revenue minus expenses, so most self-employed people try to maximize the amount of expenses they deduct.
What Can You Deduct?
The short answer is anything that is considered a business expense. This is where accountants add a lot of value as they can mention items the worker might not think to include.
Here are some basic costs that can be written off.
If you work out of your home or rent an office space, that’s fair game. Your computer, phone and software are all deductible items. Even health insurance and marketing costs are considered business expenses, so they can be written off as well. If you have a business meeting at a restaurant, your meal is considered an expense.
Just remember to keep all of your receipts because you need to be able to prove that each of these expenses is tied to your business. And the chances of an audit are higher for the self-employed, so make sure you’re prepared.
There’s also something called a qualified business income deduction that could provide the gig worker a 20 percent deduction from taxable income. There are a few limitations that apply, and it’s based on business income, so consult your accountant to see if you qualify.
Investing in a retirement account can lessen your tax burden as well because you don’t pay taxes on funds you put into a retirement account. And there’s a secondary benefit as well: You’re saving for the future. This second piece is especially important because gig economy workers don’t have the benefit of a pension or employer match on a 401(k). It’s up to them to ensure they have enough money to live on in retirement.
Working in the gig economy provides more freedom, but with that freedom comes additional responsibility. Being organized is key to managing that responsibility.
Michael Babikian is founder and CEO of LegacyShield Solutions, Ponte Vedra Beach, Fla. He may be contacted at firstname.lastname@example.org.
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