Here’s a stunning (and unfortunate) fact: gig economy workers earn 20% less than the average American worker. If you’re one of the 10s of millions of Americans operating as a sole proprietor, you’ll need to maximize every dollar and cent you earn.
Every year, the number of Americans working in the gig economy grows more and more. With tax season right around the corner, we thought it’d be a great time to share our top tax tips for those hustling and bustling in the gig economy.
Gig Economy Tax Tip #1: You Probably Need To Pay Your Taxes 4x A Year
If you’re new to the gig economy world, you may be surprised to know that self-employed individuals essentially need to pay their taxes quarterly, rather than just yearly like most workers.
If you were to work for a separate company, your employer would withhold taxes from your paychecks. As a self-employed individual, that duty falls on you.
Because of this, you are required to pay both your own Social Security and Medicare taxes. You will also pay taxes that typically fall in the purview of your employer, resulting in 15.3% of your net pay going to Uncle Sam.
Gig Economy Tax Tip #2: Set Aside Money (More Than You Expect)
Because such a large amount of your net pay is going from your bank account to the IRS, many people starting out their gig economy careers experience some panic when they move to file their first quarterly tax return. It can take a lot of effort to start earning more than the national average, so you may not be exactly flush with cash when starting out.
If you don’t pay your quarterly taxes, the IRS will slap you with large fines. This can result in even more of your net income being taken from you. It’s extremely important to pay them on time, so be sure to have enough saved away to prevent those penalties.
With that said, a lot of the time, the IRS is fairly generous when it comes to deadline extensions. The form that the vast majority of gig economy workers reading this should research is form 1040-ES.
Gig Economy Tax Tip #3: Don’t Disregard Deductions
One of your strongest tools to save money as a self-employed worker is taking tax deductions. It would be unethical (and unlawful) to deduct anything and everything. That said, taking legitimate deductions can be a great way to save more of your income.
Generally, if you’re paying for something and using it for work, you can deduct it from your taxes. This can include things like supplies (snacks for rideshare customers, phone chargers, etc.), car repairs, and, of course, your mileage.
It’s important to keep track of your expenses. One of the best ways to do that is by using a modern mileage tracking app like TripLog. With TripLog, you can easily categorize your expenses and access detailed reports within the app.
If you have a space in your house that you work out of, you can use the home office deduction. In addition, TripLog’s company mileage tracking features ensure that you will never miss a deductible mile.
Gig Economy Tax Tip #4: Keep Good Records
All legal liability falls on your shoulders as a self-employed individual. This can offer you significantly more freedom compared to being a traditional employee. That said, this also will demand additional efforts on your end.
If the IRS were to come knocking on your door asking for more information on a claim you made when filing your taxes, you will need to be able to reasonably substantiate what you claimed, or else you could incur additional penalties and fines.
You could hold onto your receipts, but organizing stacks and stacks of paper can be a nightmare. Thankfully, if you’re using TripLog, our app’s automatic receipt scanning will make organizing your expenses for tax time a breeze.
Don’t mistake the flexibility of being self-employed with a lack of responsibility.
Gig Economy Tax Tip #5: It’s Never Too Early to Start Thinking About Retirement
The issue of putting money away for retirement will fall squarely on your shoulders as well. Whether you’re 18 or 48, the best time to start considering what you’re going to do when you retire is today.
Related: 4 Best Tips For Road Warriors (2021)
Many traditional companies will have 401(k) plans in place, but if you’re entering the gig economy, there is no parent company there to hold your hand in circumstances like this. While we can’t offer direct financial advice, opening a Roth IRA might be a good direction for people starting out.
A Roth IRA allows you to contribute up to $6,000 per year, but you definitely don’t need to invest that much if you’re just starting out. As we discussed previously, when you’re getting your feet wet in the gig economy, you may not be earning a whole lot, and with the price of goods going up year over year, you’ll definitely feel inclined to keep as you can in your bank account.
Regardless, this is a factor that many Americans overlook. According to a recent survey, over 1/3 of all Americans have never set aside anything for their retirement. Don’t let that be you!
No matter what, one of the best things you can do as a gig economy worker is take advantage of as many tools as you can. Drivers using TripLog stand to save thousands of dollars every year via tax deductions and time savings.