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Karla Dennis, EA, MST, is CFO/CEO of the award-winning tax accounting firm KDA Inc.—specializing in tax planning.
As a freelancer and a gig worker, you need to understand that you have tax compliance different from when you were just a W-2 wage earner. Your tax compliance requires you to file a different type of tax form. In many cases, you’re going to file a sole proprietor schedule C form that is going to go into your income tax form. You will file that if you’re also a single-member LLC. But if you formed an LLC and you elected to be taxed differently, then you’re going to file a completely separate tax return that’s probably going to be due on March 15, not April 15.
Estimated Taxes And Self-Employment Taxes
Estimated taxes are a big part of your compliance. When you are self-employed as a business owner, you are responsible for paying your taxes yourself. There’s nobody else out there who is going to withhold your taxes. You need to pay estimated taxes. Therefore, write these dates down: due dates are April 15, June 15 and September 15 of the current year and January 15 of the next year.
Managing self-employment taxes is such a big deal when you are a freelancer or gig worker. As the business owner, remember, you have to pay in Social Security and you have to pay in Medicare, and now that you’re both employer and employee, you have to pay both sides. When you had an employer and you were having a certain amount withheld out of your check and your net check was less, well, your employer was paying the same amount on the other side of the equation. And now you have to pay it, and the law says you have to estimate your Social Security estimate, your Medicare tax estimate, your income tax, both federal and state, and pay it quarterly to the IRS. Don’t forget to pay your state taxes to your state revenue department every single quarter. What happens if you miss a quarter? Well, the sky won’t fall, but if you continue to miss quarters, you may face penalties, and then you may be on a list as being out of compliance.
Tracking Income And Expenses As A Freelancer Or Gig Worker
Tracking income and expenses is also your responsibility. You have to track it. You have to be able to present your accountant with a profit and loss form, and let me tell you something, sending your credit card statement is not a profit and loss form. Sending your accountant your bank statements or your exported bank transactions in an Excel document is not a profit and loss form. If you want to be profitable in business, if you want your business to grow, you need to have a profit and loss form and a balance sheet and get a reputable bookkeeper and accountant to do it. You need to understand where your profit is. Profit doesn’t mean money left in your bank account; that is not profit. So make sure you understand profit and loss and how to track your income and expenses as a freelancer and a gig worker.
Tax Deductions For Freelance And Gig Workers
Understand the common tax deductions that you want to make sure you’re taking. Many times when we first start out, maybe we’re going to go work in somebody’s office and we don’t realize that we are a business owner. But you are a business owner. Whether you went and formed an LLC, whether you went and got a business license, whether you have a business bank account or not, you are classified as a business owner for tax purposes. Therefore, you want to make sure you’re writing off the business owner deduction, home office deduction, car expenses, cell phone and meals for the convenience of the employee. You are the employee. You want to take all of those deductions. Ask yourself, What do I need to conduct this job?
Retirement Savings Options
As a gig worker or freelancer, you can contribute to your own retirement account. Start with $50, start with $100, $200—increase that amount, but start. Why? Two reasons. Number one, it’ll reduce your tax bill because it’s going to be tax deductible. Number two, it is for your future. When you worked for an employer, you probably had some type of retirement plan set up, or you at least paid into Social Security, but now you’re it. You have to make sure you’re planning for your own retirement funds. So start now.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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