The answer to the question “What is the most popular type of work in the US?” is fairly simple. The cumulative answers are self-employment and freelancing. More than half (53%) of the Gen-Z workforce are fascinated by the idea and nature of self-employment. Especially in the aftermath of the global pandemic, the workforce has been thrilled by the idea of doing what they love and are passionate about at their own time and pace. Many employees are steering away from the 9-5 or the long hours and picking up their own gigs, referred to as the gig economy.
What is the gig economy?
This refers to the trend of short-term, flexible, and project-based jobs that can ideally be done over a digital platform. The workers earn through their individual projects, which is also referred to as the gig, rather than traditional full-time employment. The main reason why more and more working professionals are choosing this model for their income is the abundance of flexibility and the balance between the personal and the professional.
While there are many upsides to the gig culture, tax preparation freelancers and self-employed individuals is worrisome.
Key challenges that gig workers face when it comes to tax preparation
The tax preparation process in the US comes with its own set of complexities. While the gig economy presents a plethora of benefits, such is not the case when these workers sit down to file their taxes. And here’s why:
- No employer withholding:
Unlike the traditional modes of employment, freelancers and gig workers cannot automatically have their taxes withheld from their paychecks. These traditional methods relieve workers of a lot of added stress. This means that the workers have to set aside a part of their income and be liable for their tax obligations. This can get especially difficult if they do not have a professional accountant’s guidance and structure. When the time comes, freelancers might even find them short of the money they need to save.
- Fluctuating incomes:
The problem with tax and gig workers is that they have irregular and unpredictable income streams. Some months they might be flourishing financially and the others might be harder. And this difference could be vast. This also prevents them from estimating and planning for tax payments accurately and on time. Freelancers might have to worry about sudden tax surprises, where they owe large sums of tax money or face difficulties in meeting their financial obligations.
- Regulatory complications:
Tax codes are complex across the country. This is applicable even for seasoned professionals. When it comes to tax planning for freelance workers, they are compelled to navigate through various tax rules, deductions, and credits specific to their self-employed status. Understanding the nuances isn’t as easy and analyzing the estimated tax payments is even harder for those without any prior tax knowledge and experience.
- Self-employment taxes:
In traditional models, the tax payable is often divided between the employers and the employees. However, in the case of freelancers, they are subject to paying the entire share of Social Security and medical taxes by themselves. This added tax burden can often catch freelancers off-guard. These taxes are often unaccounted for when setting their earning rates and estimating their incomes.
Tips to ace tax preparation for freelancers:
- Maintain accurate records:
For workers who work independently and do not have anyone to keep track of their income, expenses, and investments like an employer, it is important to keep accurate records. It will help comply with tax laws and regulations. Accurate records also help freelancers and gig workers determine their taxable incomes and expenses while ensuring they pay the right taxes. Having these records in place also makes it easier to prepare tax returns and resolve inquiries from tax authorities. Organizing the records also reduces the chances of errors and makes spotting discrepancies easier.
- Be aware of the obligations:
Your tax responsibility is widely different from those of the traditional employees. As a freelancer, you have several tax responsibilities on your earnings. Knowing your tax obligations is crucial for gig economy entrepreneurs as it helps ensure compliance with tax laws. Understanding your tax obligations involves researching and being aware of the regulations that apply to the business—taxable income and expenses, form types that need to be filed, and deadlines to be met. Failing to oblige with these taxes can impact compliance.
- Set money aside for taxes:
As a freelancer or gig entrepreneur, setting aside money for taxes is solely your responsibility. Doing this thoroughly will help save time and money in the long run. Setting aside money when you have enough helps you prepare for the slow income times. This helps ensure that you have enough funds to pay your taxes when they are due. Planning helps ensure that you are prepared for the season. With the seasonal influx of work, the practice of setting aside money is also a great way to budget and plan your days.
- Stay updated with the tax laws:
With great freedom comes great responsibility. This saying is equally prevalent for gig workers. While freelancing gives them the independence to choose their hours and the kind of work they do, they are also responsible for not falling prey to legal issues and penalties. Tax laws evolve at a rapid pace and they need to keep up. Staying updated with the developments can help save time and money when filing your taxes. It also helps you stay ethical and compliant.
- Hire a professional:
Whether you run a small, independent business or operate alone, outsourcing your tax jobs to a professional is a great way to manage your taxes. These professionals can add valuable advice on how to pay the least amount of taxes legally. They also help freelancers, entrepreneurs, and business owners ensure that they are compliant with all applicable laws. Moreover, tax professionals also can guide on deductions, credits, and other tax-saving strategies that can be valuable to these gig workers. The support of a tax professional is an invaluable asset for entrepreneurs looking to maximize profits.
Tax strategy in the gig economy – Wrapping up
There are several challenges to tax planning in the gig economy. Being a part of the gig economy requires a thorough understanding of tax obligations and strategic financial planning. This economy offers a wide range of benefits, but is not devoid of its challenges – tax strategy being the topmost. By maintaining the right techniques, you can help develop a future that works in your favor.
To know how outsourcing can help with your taxes if you are a part of the gig economy, write to us at connect@finsmartaccounting.com.
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
