4 Tax Tips for the On Demand Workforce
Today, many workers are intoxicated with that informal motto of the on demand economy – be your own boss. Whether you drive for Uber or buy coffee for folks at Postmates, being an independent contractor poses some challenges when the tax man rolls around. Here are 4 tips to avoid tax problems if you’re a part of the gig economy.
- Consider Your Classification
Misclassification is widespread in American business. Some companies classify its workers as independent contractors even though they actually function as employees in order to save money. Unless you’re raking in some serious cash, it’s wiser in the long haul to be an employee. Plus, you’ll be able to avoid getting ripped off on taxes, collect unemployment insurance if you lose your job and earn overtime wages. While there is a lot of controversy over this, you might want to consider asking your employer to classify you as an employee.
- Track Your Business Expenses
It’s vital to keep track of all your work-related expenses. If you’re working from home, keep a list of your out-of-pocket expenses, such as phone calls and Internet costs. If you’re an Uber driver, hold on to receipts from car washes, oil changes and gas stations. If you’re a courier, keep receipts for all of the subways and buses you take throughout the workday. All of these business-related expenses can be deducted on your annual tax return. When you’re unsure about whether or not something counts as a business expense, keep track of it anyway. You can always consult with a tax professional. The bottom line here is that it’s best to have too many records than too little. Consider having an exclusive credit card or bank account to keep personal and business expenses separate. Also, be sure to take all of the applicable and allowed standard deductions. For example, as long as you devote some portion of your home to a business activity, you may be able to deduct up to $1,500. You can even deduct a percentage of utilities and rent. The rules are complicated but the benefits in planning are rewarding.
- Pay Your Taxes Quarterly
When you’re an employee, your boss deducts taxes from your paycheck. On the flip side, independent contractors must do it on their own. If you don’t, you could be docked with interest and penalties from the IRS when you file your April tax return. The federal government has estimated tax obligations with dates scheduled four times a year. You can easily file online. While it’s tempting to think you can settle up with the IRS in April, it’s just not worth it. You’ll just be penalized for not paying on time.
- Don’t Send Up Any Red Flags
Uncle Sam doesn’t go easy on people who hide income. When PayPal or Uber sends you a 1099 form reporting your income, the IRS gets a copy, too. Although it may take some time for the IRS to notice that you’re not reporting your revenue, it will eventually catch up with you. This will send up a red flag to Uncle Sam. Another red flag is if your business expenses are higher than your income. If you’re losing money each year, this may limit your deductions. Lastly, entertainment, travel and recreation expenses garner attention from the IRS. Just because you’re a home travel agent doesn’t mean you can deduct fancy cruises. Keep in mind that you can only deduct half of the cost of a meal when you take clients out for lunch or dinner. Even if the cost is modest, it needs to have a documented business purpose.
Filing taxes is tricky business for everyone but even trickier for those who are self-employed. Get savvy and let an accountant or tax professional take care of it for you.