Common Tax Mistakes of Gig Workers

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More and more people are becoming gig workers due to the massive layoffs in recent days. It can be an excellent way to get some short-term income—and some people find that they can make more money through gigs than with a full-time job. Of course, you can expect to pay some taxes anytime income is generated.

Going from employee to freelancer places people unfamiliar with their new tax category in a position to make some common tax mistakes. In some cases, the new gig workers may be paying more than $3,000 in unnecessary taxes.

The Internal Revenue Service issued a warning to gig economy workers that they must report their income if they have earned more than $600. They have set up a website, the Gig Economy Tax Center, to explain who falls into the gig economy classification and how to report your income and deductions.

Here are some of those tax mistakes and how to keep more money in your pocket.

Not Understanding Your New Position

Employees are limited in their ability to get tax deductions, but once you become self-employed, you are under a new set of rules. Knowing them can enable you to keep more of your hard-earned money.

Gig workers and freelancers come under the tax category of self-employed, which means they are a business owner. It enables you to deduct many business expenses, but you must keep accurate records. You also must keep good records of your income and where its source.

Your business income and expenses must be reported on a Schedule C tax form when you fill out your 1040 taxes. The IRS is paying close attention to the details on the tax forms of gig workers to ensure you honestly report your income and that your deductions are real and legitimate (not excessive).

You can deduct almost every reasonable business expense from your taxes. Some of those possible tax deductions include:

• Startup costs
• Office equipment (computers, printers, peripherals, etc.)
• Specialized equipment needed for your business
• Rent for business space and utilities
• Home office
• Advertising
• Electronics
• Office supplies
• Supplies for your business
• Vehicles
• Travel mileage
• Some meals
• College classes related to your business
• Miscellaneous

Each possible tax deduction listed above may have some special rules that apply. Be sure to know what they are before claiming them.

Claiming a Home Office

People who have a legitimate right to claim a home office can deduct a considerable amount of money for it—$1,500 maximum (simplified option) just for the space. You can also itemize and deduct the proportion of your home’s space used for your office for the cost of utilities, mortgage, or rent payments, insurance, repairs, and more.

The IRS looks carefully at anyone claiming this tax deduction. It could easily lead to a tax audit if you do not know the rules.

Before thinking about claiming this deduction, you must use the space exclusively for your business. It must also be your primary office, but it can be in an outbuilding on your property.

Items used for business and personal purposes, such as a computer or cell phone, must be pro-rated on your taxes. You will need to estimate the percentage of use for each item. You can only subtract the business portion of the initial cost and any monthly charges. Some items, such as computers, have a depreciation period, thereby allowing you to subtract a portion of the cost over two or more years.

Not Keeping Thorough Records

When you work for a company as a gig worker, you will get a 1099 NEC (non-employee compensation) once the tax year is over. A copy of this document is sent to the IRS, so you must be sure to report all income.

If you receive cash payments, you need to keep accurate records. You can do this in several ways. These records can be kept digitally, but you should also keep printed copies because computers can crash.

Your records can be on a spreadsheet, on bookkeeping software, etc. WealthFit gives some good suggestions: when you get paid in cash, always deposit the total amount and get a bank receipt for it. You can also give a receipt to the client and have them sign it, or give the client a contract stating the amount to be paid, and have them sign it.

Having proof of income as a gig worker can also benefit you in other ways. When you need to apply for a loan or find a place to live, having financial income records will help you get a better deal.

You will also need to have proof of your deductions. The IRS accepts proof from receipts, bills, and credit card statements. Organize them for easy access and enter them into your records to make it easier to prepare your tax forms.

Not Putting Any Money Into a Retirement Account

Just because you are not working for an employer does not mean you cannot save money for retirement. Money put into a retirement account is often tax deductible. NerdWallet says there are five choices for the self-employed: a SEP IRA, a solo 401(k), a traditional or Roth IRA, a SIMPLE IRA, and a defined benefit plan.

Some of these accounts have higher contribution limits than others and earn interest tax-free until you withdraw it after you retire. It can give you even more deductions and help you prepare for the future. Not all of the contributions to the above accounts are pretax or have minimum required distributions (Roth IRA), but if they are not, you will not pay interest when withdrawing the money in retirement.

Not Setting Money Aside for Taxes

Remember that after the end of the year, you will need to pay taxes on your income, state and federal. As a business owner, depending on how much income you generate, you may need to make estimated quarterly payments to the IRS. MotleyFool mentions that if you end up owing a considerable amount, you could have to pay an underpayment penalty.

If you have questions about how to claim income or any deductions you are unsure of, you can find answers on the IRS website or go to a tax professional. They can also help you find and claim all the tax deductions you are entitled to as a gig worker.

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