Daniel Ellern lost his main job in accounting nearly two years ago. He already had a side job driving for Uber, but he ultimately found more lucrative work assembling Ikea furniture through TaskRabbit.
Ellern said he soon began earning as much putting wardrobes together as he did in his old office job but needed to apply his bookkeeping skills to his own situation — and that can feel like a job on its own.
Freelancers, independent contractors and gig workers like Ellern have more work to do during tax season than traditional employees. They’re essentially running their own businesses, whether that’s selling jewelry on Etsy or providing graphic design services through platforms like Fiverr. The same rules also apply to social media influencers who are paid by brands with swag or real money.
People who work for traditional employers fill out forms that dictate how much tax should be withheld from their paychecks. But freelancers must track their income, document expenses and pay their estimated tax bill — and most filers need to sort it out by April 15.
President Donald Trump announced Wednesday night that he will instruct the Treasury Department to allow individuals and businesses negatively affected by the coronavirus to defer their tax payments beyond the April 15 filing deadline. Check the irs.gov site for details.
Here’s some advice on how to make it more manageable, from veteran freelancers and the tax professionals who work with them.
Where to Report
If you haven’t set up any formal business structure — or even if you have, as a single-member limited liability company — income is reported through the standard tax return, Form 1040. You’ll also need to include a Schedule C, which lists income and expenses. There may be state and local tax forms as well.
Freelancers and self-employed people don’t always receive official tax forms tracking their income. If you receive payments directly from customers, you’ll need to keep records. But some people will receive documentation after they hit certain thresholds: If a client pays you more than $600, for example, you may receive a 1099-MISC. Another form, the 1099-K, tracks income paid through credit- and debit-card payment networks. It is issued when the amount collected exceeds $20,000 and is for more than 200 transactions.
“It’s a common misconception that if a taxpayer does not receive a Form 1099, that income isn’t taxable,” said Kathy Pickering, chief tax officer at H&R Block. “That isn’t true.”
Traditional employees generally split the payroll taxes that are automatically deducted from paychecks with their employer; these taxes pay for Social Security and Medicare.
But the self-employed who earn more than $400 in net profit are generally responsible for the entire amount, also known in the freelance world as self-employment taxes. Half of the amount paid can be claimed as a tax deduction.
Expenses and Deductions
Paying those extra taxes is a bummer, but being self-employed also means you can deduct an array of business expenses, even if you don’t itemize personal deductions on your return.
“You absolutely have to track your expenses unless you want to forfeit all of your money” to the government, said Ellern, 33, of Yonkers, New York. He uses QuickBooks and also likes the app Stride, which helps track mileage, expenses and other items.
Several deductions apply to many businesses. The home office deduction is one of them. Tax pros warn that you must have a dedicated space that is used “exclusively and regularly” for your business — not the dining room table.
There are two ways to calculate it: The simple method lets you deduct $5 a square foot of dedicated office space, up to a maximum of 300 square feet. A more complicated calculation, based on the percentage of your home used and other actual expenses, could generate a larger deduction.
“It is almost always worth it to use actual expenses for people in high-rent areas,” said Russell Garofalo, founder of Brass Taxes, a tax firm that works with freelancers and self-employed people.
Cellphone and internet service are also often deductible, for example, as long as you can document the percentage of time you used it for work.
Another big category is health insurance. Self-employed people may be able to deduct premiums for themselves and family members as long as they weren’t eligible for employer-sponsored coverage (even through a spouse).
Some Gray Areas
Some deductions tend to confuse taxpayers because the rules are more nuanced or are seemingly subject to interpretation. And when taxpayers envision a potential audit, they “rationalize their expenses as if they are going to be talking to an elementary school assistant principal,” Garafolo added. “And they don’t realize they will be talking to a homicide detective.”
Which tax breaks trip up filers most often? If you have a work-related lunch with a client, for example, you can generally deduct half of the bill, as long as the meal is “reasonable based on the facts and circumstances” and not “lavish or extravagant.” But you can’t write off a round of golf with a customer.
Another tricky situation arises when mixing vacation with business travel. If you have a single speaking gig during a weeklong vacation, you can’t deduct the plane tickets. But if you tacked on a couple of days to do business, you can deduct your hotel, rental car and half of your meals for those two days. Plane tickets are deductible when the main purpose of the trip is work related.
Transportation expenses — say, a 20-mile drive to meet customers — may also be deductible and can be accounted for in a couple of ways. For driving, you can generally take either the standard mileage deduction or actual expenses to operate the vehicle (lease payments, insurance, gas, oil) based on the ratio of business to personal use. Track and document both, then claim the larger deduction.
Contributions to tax-advantaged individual retirement accounts like traditional IRAs and Simplified Employee Pension, or SEP, IRAs may also be deductible. SEPs are often the better choice because self-employed people can contribute far more than with a traditional IRA, said Dina Pyron, a partner at Ernst & Young overseeing the firm’s EY TaxChat filing service.
An Added Bonus
Many self-employed people may be eligible for a tax break enacted as part of the 2017 tax law. It allows those with so-called pass-through entities — that is, their business income passes through to their personal return — to deduct up to 20% of qualified business income.
This generally applies to people whose businesses are set up as sole proprietorships, partnerships, limited liability corporations or S corporations. But once your income exceeds $160,700 if you’re a single filer or $321,400 in a joint filing, the eligibility rules get even more complicated and certain types of businesses will no longer qualify.
Estimated Tax Payments
Self-employed people may need to make quarterly estimated payments — particularly if they expect to owe more than $1,000 — to avoid penalties for not paying enough throughout the year.
JamiQuan Saenz, a 41-year-old social worker in Sacramento who cleans homes and cooks meals for clients in gigs found through TaskRabbit, regularly stashes money for taxes.
“Every time I take a job, I take 30% out,” she said, adding that she puts it in a dedicated savings account. “If I have extra, great. Then I have a cushion.”
The Internal Revenue Service recently introduced a Gig Economy Tax Center on its website — a reminder to comply with all of its rules, and a good resource for finding all you need to know in one place.
If you still have questions or doubts, the peace of mind provided by a tax professional may make the cost worthwhile.
“An accountant is really a nominal expense, and it more than paid for itself,” said Adrienne Johnston, 37, of Seattle, who designs PowerPoint and other presentations for clients. “It makes me feel better about not making mistakes about things I just don’t know about.”