In the not-so-distant past, the word “gig” was used only to describe the work environment for musicians and comedians who would travel from city to city for performances for one or two nights or perhaps a week at a time.
But, thanks to the Internet and the changing work environment in the United States, an entirely new “gig economy’’ has been created. People who can work remotely are hired as independent contractors to perform specific duties.
Meanwhile, employers are able to cut costs associated with full-time salaried employees. Those costs include health and retirement benefits and payroll taxes.
Many people also are starting their own small business. Whether they are celebrating a personal passion or employing themselves because the job market is thin, becoming you own boss is a big step.
While it’s a great feeling to be producing your own product or service, doing so comes with a new responsibility to document your own income and expenses.
The single most difficult aspect of being self-employed is determining your federal and state tax liabilities. In order to avoid running into conflict with the Internal Revenue Service, self-employed workers need to be prepared.
Gig workers are rarely salaried. They get paid for each task performance, and their pay usually comes without the benefit of having federal or state taxes removed from their paycheck.
That’s great at the moment, because there is more cash for the self-employed worker. But when it comes time to pay taxes, all of that income is reported by the employers to the Internal Revenue Service, which wants their appropriate share.
Lower your taxes
Successful small business owners will have income from a multitude of clients and customers. Bookkeeping becomes one of the hardest jobs to undertake.
Without proper planning, self-employed people find themselves awash in tax problems. They are required to pay the taxes on their income, and they may not know what deductions they can take on personal work expenses to offset the tax bite.
Here are some tips to the self-employed on how to prepare for the day when you file taxes:
First, tax yourself. This is the one step that might be best taken with the advice of a tax professional.
First, determine what your personal tax rate is going to be based on your approximate annual income. When payments come in, deduct the funds that will cover your tax liability in the next year.
That money can be put into an interest-bearing checking or savings account, which will make it more difficult for you to spend it or depend upon it for your monthly bills.
If you do tax yourself’ with every payment you receive, it is likely you will end up with more money than you are required to pay in taxes due to deductions discussed below.
You will thus have a newly created fund for personal spending once your tax bill has been paid.
If you operate a small business out of your home, you can deduct a portion of your telephone bill, the cost of internet, and other costs (paper and ink, computer programming updates, furniture, etc.) to offset your tax liability.
Keep good records
Document all of your expenses related to your home office.
If your business requires travel, you may be able to deduct the cost of gasoline and vehicle upkeep based on a standard mileage rate provided by the IRS. That mileage rate is subject to change due to the volatility of the oil market and cost of automobile upkeep.
However, a self-employed person can also list actual travel expenses on their tax return, which would require all payments made for fuel, insurance, registrations, licenses, maintenance costs and tolls where applicable.
It is possible that such detailed cost bookkeeping will end up providing you more than the IRS standard mileage rate. Detailing travel expenses in this fashion, rather than accepting the IRS standard mileage rate, also is an easy way to “ding” the IRS watchdog system and incur an audit or request for additional documentation.
Depending on the complexity of the work you are doing and the size of the business you are conducting, there are other tax considerations to discuss with a professional, including depreciation of equipment, entertaining of clients or promotional expenses.
In such cases, a conference with your accountant would probably provide much-needed guidance and provide for additional deduction possibilities to further reduce your tax liability.