A lot of people have joined the gig economy. Others may call it a side hustle or freelance gig, but as long as you are working outside the regular working hours or you are filling your free time with things to do to make money, you are in the gig economy. Working in the gig economy might have brought a new line of income. However, there are some tax requirements that you should handle wisely to avoid issues with the IRS.
The current tax laws specify that any independent contractor must make the quarterly state as well as federal taxes as long as they make more than $12,000 per year. It is always a good idea to use your previous year’s income to approximate quarterly payments. Additionally, you can set aside a third of your income for taxes, to avoid penalties. The IRS requires you to break up the taxes you owe for the year into four quarterly payments. Making these payments on time is very important to avoid penalties, which might add to the tax you owe. The deadline for paying the quarterly estimated taxes is usually on April 15, June 15, September 15, and January 15 of the next year. One main benefit of paying your quarterly taxes on time is that it allows you to understand your cash flow better.
Don’t ignore tax deadlines
The idea of giving money to the IRS in advance is never pleasant; however, it serves a purpose. The first reason for making timely payments is that you will avoid surprise taxes. Failure to pay your quarterly estimated taxes adds a large unpredicted bill that you might not be ready to pay. The IRS charges penalties for late or inadequate payments. Most taxpayers avoid penalties. However, not filing your returns will cost you an extra 5 percent of your due tax bill every month. Interest is also charged as an unpaid balance; these interest rates are centered on the federal short term rates, plus 3% points. Keep in mind that the interest rates keep changing.
It can be very tough if you owe the IRS $10,000 and above then fail to pay on time. The federal government, as well as the state government, might put a lien on your property. However, if you are paying the taxes late, you can set up a payment agreement with the IRS and get your monthly interest rate dropped to 0.25 percent. You can also arrange payment for as low as $25 every month for as long as five years. The IRS can waive your penalty if you failed to pay your estimated quarterly payments due to a disaster, casualty, or any other situation like you become disable after retiring.
Write off your gig expenses
The common mistake that most gig workers make is failing to take all the available deductions. As a gig worker, you are allowed to claim the new 20 percent qualified business income deduction. Many people think that claiming a deduction will trigger an IRS audit. This deduction is always based on your qualified business income, which is your net salary calculated after deducting all your regular business expenses. Deductions are significant since they reduce your amount of taxable income. The best way to write off your gig expenses is by writing off 5 percent per each square foot of your home used for corporate purposes. To qualify for a home office deduction, your area needs to be used only for work; remember to include photos as proof when filing your tax return.
According to the IRS, tax-deductible business expenses must be ordinary as well as necessary. An ordinary expense is anything that is purchased by other business owners in your industry. For instance, rideshare might be able to deduct water and snacks for passengers. The necessary expenses are the costs that are needed to run your business.
Take advantage of apps
Everyone in business, whether dependent or independent, must keep good tax records. Keeping a record of your taxes allows you to monitor the growth of your business and prepare your tax returns. With advanced technology, there are many tax preparation Apps made available for use. You can submit your tax return to the IRS depending on your circumstances with a few simple touches of a button. Tax preparation Apps allows you to file your tax returns anywhere at any time.
If you are a freelancer, you need a reliable tax service that will make filing your tax returns easy. One major problem faced by gig workers is tracking their business income and expenses as well as filling income taxes of their income. Therefore, many tax preparation companies have created particular versions of their tax services for the gig economy, Turbo Tax for example. People in the gig economy usually need to report most of the tax items; however, they must also file a Schedule C and pay the dreaded self-employment tax. These tax preparation Apps are tailored to help self-employed people since they support all the IRS schedules and forms.
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