The gig economy is exploding, but the ease of on-demand jobs has many overlooking a key factor: taxes. Use these tips to avoid future tax-related headaches.
By Dave Allen
Work from home. Set your own hours. Be your own boss. Augment the income from your full-time position.
There are a ton of reasons to get involved in the gig economy, and even more reasons to love it. Unfortunately, that means it’s also very easy to get swept up in the hype. To dive headfirst into a career as a freelancer without considering the ramifications.
Self-employment is pretty awesome whether you do it as a career or just to make some extra cash on the side. However, there are a few things you need to understand about it before you can determine if it’s for you. As you might expect, pretty much all of them involve taxes.
Get Used To Doing Paperwork – Because There’s A Lot Of It
I don’t think I’ve met a single human being who enjoys doing taxes (accountants don’t count). The problem lies as much with how much math is involved as it does with the paperwork involved. And here’s where I’ve some bad news for those of you considering getting into the freelance game.
All that paperwork you needed to fill out at your day job? You’ll probably have to at least double it. As an independent contractor, not only do you still have to fill out Form 1040, you’ll likely also have to fill out a 1099-MISC form for each and every client you work with. The 1099-MISC acts as a substitute for the W-2 Form, intended to clarify earnings with clients who’ve paid you $600 or more over the course of a year.
You’ll also need to familiarize yourself with the various components of Form 1040, including Schedule A (deductions), Schedule B (investment income), Schedule C (freelance income), and Form 1040X (for correcting errors). Finally, it may also be worthwhile to fill out Form 4868, in case you need more time to get your finances straight for your first return as a freelancer.
Of course, you’ll also need to fill out the W-2 if you have a full-time job alongside your freelance gig.
Make Sure You Set Aside Enough Money For Taxes
One of the most frequent bungles I see with first-time freelancers involves their first-year income tax – namely, they don’t have enough money to actually pay it.
It’s an easy mistake to make. After all, if you’re used to working for an employer, you’re used to your paychecks being more or less entirely yours. It works a little differently if you’re freelance, though.
As a freelancer, you count as both employer and employee. In the United States, this takes the form of a self-employment tax. Assuming your net earnings are $400 or more, the self-employment tax is equal to 15.3% of the first $128,400 of your earnings. Note that this is paid separately from income tax.
Depending on how much you make (and spend), that can lead to a rather unpleasant surprise at tax time – a huge tax bill that’s either impossible to pay or leaves you saddled with additional monthly expenses that could break the bank.
Figure Out How To Accurately Track Your Income And Spending
These days, it’s easier than ever to overspend – to throw away money we don’t have on stuff we don’t need. A Netflix subscription here, a monthly payment there, a coffee every morning, going out for dinner once a week…it adds up fast. That’s why I’m of the mind that everyone – but especially independent contractors – should use a spending tracker app.
As a freelancer, it’s not just a matter of saving money. Keeping an accurate record of how much you spend and what you spend it on can be immensely useful for tax purposes. You might be surprised at the things you can list as business expenses when you’re freelance:
- Maintenance fees and travel cost
- Dinner/lunch with clients
- Home office supplies and furniture
- A portion of your rent, mortgage, and bills
You get the idea.
My personal recommendation is the aptly-named Spending Tracker, which is available on both Android and iOS. It’s easy to use, allows you to create multiple categories and accounts, and gives you a visual representation of how much money you’ve spent each month every time you open it. Plus, it’s free (though there’s also a premium version without ads).
Get Your Finances In Order
Self-employment is incredible, but it’s not all smooth sailing. There are a lot of challenges surrounding taxes and finances, and if you go in without a clear understanding of them, you’re likely to get blindsided. It’s important to understand the rules and regulations surrounding taxation beforehand.
Or you could just hire an accountant – that’s perfectly fine, as well.
Dave Allen is the owner of Ridesharecentral, a company that provides information to new rideshare drivers as well as current rideshare drivers. Rideshare Central makes it easier for rideshare drivers to get started and drive profitably. Follow them at @ridesharecent.