Traditional, stable, salaried positions within a corporation or established business are no longer the norm. Many professionals are looking for opportunities as “gig workers” because it offers flexibility, independence, and adventure. Anyone looking for jobs based on temporary placement, working hours, or freelance jobs classifies as such. As with most financial topics, there is very little education on the implications of going down this path of employment, particularly from a tax perspective.
In the following article, I will examine common tax strategies that our clients implement to reduce their overall tax burden as gig workers. We work with many self-employed individuals and will embed some of the insights we’ve learned and applied throughout the years.
As a self-employed person, business expenses are all but guaranteed to be higher relative to those who are employed by a corporation. In gig work environments, you will likely have to provide your office supplies and equipment. A benefit of being a gig worker is the ability to write off costs associated with the job. Office supplies including printers, ink, and business cards are allowable write-offs. You can even deduct your laptop if over 50% of the time spent on it is for business.
When making purchases, consider if something you are buying is appropriate to write off as a business expense. Up to 50% of the cost of business-related food expenses, like lunches, can be written off. The IRS rule of thumb is that basic expenses should be ordinary and necessary.
If you are self-employed, there is a good chance you work from home. The home office deduction is one of the significant deductions available to you as an entrepreneurial worker. If there is a specific area of your home designated as an office space, this deduction may qualify. The caveat here is that it needs to be used exclusively as an office space, so using the playroom while the kids are at school is not allowed to be deducted (unless your home business is a child daycare).
Another way to calculate the home office deduction is through an itemized deduction. This process is more involved as you must document all expenses related to your home office but may help offset some business expenses. The qualified expenses that are deductible to your home office include a portion of your mortgage or rent, utility costs, painting, repairs, and general maintenance. Generally speaking, the simplified home office deduction is preferable if you have a smaller home office with little upkeep or repairs. If you have a larger office with higher expenses and have the resources (or pay someone else) to keep your records organized come tax time, then it may be worth it for you to do it the long way.
Travel for business is always deductible, as long as it is legitimately for business. Traditional W-2 employees are generally not eligible to deduct their commuting expenses, but other travel expenses may be permitted. The same rules apply to 1099 workers. Airline tickets, baggage fees, rideshare costs, etc., are all deductible so long as those fees are in line with your business goals. Unfortunately, you cannot write off your vacation.
If you are required to travel for business that requires an overnight stay, the costs incurred for lodging and some food expenses may qualify. Typically, hotel and lodging fees are eligible to be written off as well as 50% of meal expenses (note that meals are currently 100% deductible through December 31, 2022, as part of the Taxpayer Certainty and Disaster Relief Act of 2020, see: www.irs.gov/newsroom/treasury-irs-provide-guidance-on-tax-relief-for-deductions-for-food-or-beverages-from-restaurants). Rental cars may also qualify for the deduction.
Currently, under Federal law, a client is required to send you a 1099-MISC form at the beginning of the year if they paid you $600 or more in the prior year. But what about those who pay you less than $600? You will not be getting a form from them, but the IRS still expects you to report that income. It is important to keep consistent, clear records of all wages that you have earned so that when it comes time to file and you realize you will not be getting that 1099-MISC, you are not scrambling through old bank statements.
Take note of any possible advantages available to you. You will be glad you did come tax time.
There may come a time when the United States will adopt a universal healthcare system. Until then, healthcare premiums are a fact of life. The good news is, if you are a self-employed worker, you can deduct 100% of your healthcare premiums if you have enough business profits. Costs associated include coverage for you, your spouse, any dependents, and non-dependent children under the age of 27. If you are working full-time as a self-employed worker, there is a good chance that health care costs are one of the highest expenses you have. This deduction can make a huge difference.
Be careful, though. You are not eligible for this deduction if you also work for a company through which you are eligible to receive healthcare benefits, or if you are eligible to be covered by your spouse’s company. And, you can only deduct what you have earned from your business:
As a self-employed individual, you can purchase a health insurance plan in either your name or in the name of one of your businesses. The name in which you register your health insurance plan is considered your plan's sponsor. You can qualify for the healthcare deduction if you are your own sponsor. If you have multiple businesses, it would be wise to purchase your health insurance plan in the name of the business you anticipate making more money from to ensure a higher deduction.
To strengthen career qualifications, many undergo additional education, training, or certification programs. These career enhancement options are all deductible come tax time; a perfect opportunity for someone whose educational interests are in line with their current business. There is a caveat: you may not write off education or training expenses for a career you do not yet have—it needs to be as a result of furthering the business you already operate.
It is considered a smart idea when you are self-employed to pay your taxes quarterly, instead of at tax time like everybody else. When you work for a business, you declare on your W-4 your withholdings. The amount withheld is taken on your behalf and paid to the state and federal government with each check, meaning you are paying your income taxes throughout the year.
If you are self-employed and you are not paying quarterly taxes, you will see the entire tax burden all at once.
Not only that, since you will have paid less than 90% of your total taxes, you will also be subject to a penalty for underpaying throughout the year. Some people find that it is easier to manage their money and will pay the penalty amount. However, this kind of thinking is naive and gives the government more money than they are entitled to. You can manage these quarterly payments online, and when April rolls around you pay the balance owed, or pick up your refund, just like everybody else. There are multiple tools available that make managing your money easy enough that you should not leave money on the table.
Many are finding that there are numerous benefits to working for yourself. The freedom of being your own boss and earning every dollar for yourself are a couple of reasons why more and more people are choosing self-employment. In this day and age, the technology available allows people to move away from traditional modes of employment and pursue careers outside the norm.
The purpose of this article is to equip those who are new to self-employment or those who do not have the tools or know-how to manage their expenses to have a better understanding of the tax structures surrounding self-employment. The unknowns surrounding self-employment and the trepidation around self-employment tax laws have been shattered thanks to the boom of the gig economy.
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