With almost 30 million small businesses in the United States, there is little to no doubt that small businesses have great potential for income. Some of the most common opportunities come from Uber, Lyft, and Airbnb.
Earning more usually means more taxes paid to the IRS. The tax collection arm of the government views these income generating outlets as small businesses. These types of entities are also subject to more audits and notices from the IRS.
Small businesses also have responsibilities like:
These aforementioned reasons also means that your interaction with the IRS and state will increase along with their scrutiny.
Here are the six most common tax problems I see with Gig workers.
1. Are there self-employment taxes?
On top of your income taxes, you are also responsible for the self-employment tax which is 15.3 %. The government uses this tax tor social security and medicare that employers typically pay for their employees. However, you can deduct half of your self-employment tax to offset your income.
2. Do you pay taxes throughout the year?
Remember when your employers deduct your taxes? Well you have to do that as well. Self employed employees have to submit taxes quarterly. If you don't face these payments, it could lead to a large bill which means you may get penalized when you file. All of which leads to an installment agreement and extension. Do not default on your agreement because that will cause the IRS to open up an investigation which may lead to an IRS tax lien which hurts your credit rating.
3. Should cash payments be reported?
According to the IRS, the self-employed only report the right income half of the time. The IRS runs on an honor system, but it has only a handful of effective weapons to validate income. They utilize these tools as effective reasoning behind an audit comes.
4. Can personal expenses be written off?
Small business owners deduct cars, cell service, in-home offices, travel, and entertainment expenses. In some instances the IRS may view these as personal deductions and not business expenses, this is where you have to keep excellent records to ensure that they are business related.
5. When is the deadline and do I have to file on time?
The answer is always yes. Inability to pay doesn't mean putting off filing is the way to go. There are severe penalties against filing such as 25 percent for failure to file for more than five months past the deadline. How does the IRS find these non filers? The magical form called the 1099-K. These forms are better known as payment card and third party network transactions. Those who process cards leave a trail of breadcrumbs and the IRS is demanding that these business find ways of reconciling payments as they are approaching with enforcement orders.
Making money means paying taxes. The business owner and the independent contractor or even the gig economy worker is responsible for their own taxes.
Keep great records and budget for quarterly estimated taxes to ensure an accurate return and always be prepared for the scrutiny of the IRS.
A tax pro such as myself can get to the bottom of the issue and even negotiate on your behalf with the IRS. Work in the economy and have questions?
Email or contact us to schedule an appointment for tax filings and a tax consultation before Tax Day.