The growth of the internet and smartphones has led to the emergence of on-demand services like Uber, Airbnb and Lyft, which rely on large numbers of freelance workers. According to a study from Intuit Inc. (NASDAQ:INTU) and Emergent Research, the number of such workers are expected to jump from 3.8 million in 2016 to 9.2 million by 2021.
There are certainly many benefits to the gig economy. People can easily earn side income and have flexible schedules. But there is also a big drawback: taxes.
You see, an on-demand service will not provide any withholding. Instead, you will need to do the tedious work of handling your own tax payments. Often this means that many people wind up making mistakes that can result in having to pay interest and penalties. In some cases, there may not even be enough money to meet the tax obligations when a tax return is filed!
So what should you do if you’re a freelancer in this situation? Here are some tax tips to help out:
Four Tax Tips for Freelancers
Report Your Income
As a worker for an on-demand company, you may actually not receive any tax statements. The reason is that — if you receive your pay via a debit or credit card — you only get a statement if you have more than 200 transactions or earn over $20,000. This can really be confusing, and because of this, many people think they do not have to pay taxes.
But they are wrong.
Any income you generate from your efforts is subject to taxes, so you need to report it. You also must report your tips. In other words, you should keep track of these, say with a notebook or app. Although, you do not have to report tips of less than $20 for any given month.
Make Sure to Make Estimated Payments
If you expect to owe $1,000 or more in taxes for the year, then you may have to make estimated payments. Why? This is because the U.S. has a pay-as-you go system.
As a freelancer, this means you will make four payments to the IRS and your state (this is assuming there is a state income tax). You will also need to include payments for Social Security and Medicare. The deadlines for the estimated payments are Jan. 15, April 15 (although, it is the 17th for this year), June 15 and Sept. 15.
If you also have a job where there is payroll taken, then you can adjust your withholding to handle the estimated payments. This is done by revising your W-4 form, which you can request from your HR department.
Get Your Deductions
There are many deductions to take. Just some include advertising, legal fees, mileage and vehicles expenses, travel, meals, entertainment, education, licenses, gifts and commissions.
But of course, there must be a business purpose to any that you take. You also need to keep records of the expenses, just in case there is an IRS audit.
So because of the complexities, it is a good idea to seek the help of a qualified tax professional, such as a CPA or Enrolled Agent. You can find one at the National Association of Enrolled Agents’ directory.
Get the Help of an App
The good news is that there are quite a few high-quality apps that can assist with your taxes. They will certainly make your life easier and help you avoid costly mistakes.
So, which are the standouts?
One to consider is Intuit’s QuickBooks Self-Employed, which really provides all the key features you need. You can track expenses and mileage (the system hooks into your financial accounts and learns over time what are personal and business items). The app will also seek out deductions and will make the necessary filings, such as for estimated payments. You can then integrate all this information with TurboTax.
As for the pricing, the app has subscription plans that range from $10 to $17 per month. And yes, these are deductible!
Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.