There are many advantages to being your own boss, but they come with their own risks and challenges. According to the SBA (Small Business Administration), there are approximately 28 million small businesses in the US. More and more people are choosing to work for themselves. Nowadays, people look for alternative work or part time jobs for extra income and there are no minimum wage requirements for freelancers.
Uber drivers for instance work part time jobs as drivers to generate extra income. As for health insurance, self-employed people can use the Health Insurance Marketplace to sign up for flexible and quality health coverage that is suitable for all small business owners and employed contractors.
Beyond the flexible work arrangement and the excitement of being your own boss, don’t forget that all gig workers are required to pay tax. For small businesses, there are extra rules to comply with and more IRS audits and paperwork to prepare. When you’re a full-time employee, your employer will do the tax for you, but when you run your own business, you are on your own. Small business taxes tend to get complicated with detailed requirements.
Here are 10 problems gig economy workers face and what you can do to avoid them:
1. Failing to report your total income
Every dollar and penny you earn as a freelancer must be reported, including cash. Always stay organized and write down all your business expenses and sources of income for the year, including the total amounts. Put them in a category with receipts as proof. The IRS suggests keeping all business records for at least three years.
2. Failing to file and pay tax
Failing to pay your taxes or not reporting all your income is a big no no. You may face a failure-to-file penalty and the longer you procrastinate, the more money you’ll owe to Uncle Sam.
3. Not filing the tax form correctly
Independent contractors are used to doing everything themselves and errors can easily happen. Completing the tax forms correctly will help you save time and avoid delays. Remember, if you pay your tax more than 60 days late you’ll have to pay a penalty.
4. Failing to report cash income
Many small businesses that operate in cash fail to report their cash payments. All income in business must be recorded including cash income. It has to be reported and taxes must be paid for the income.
5. Falling behind
Some gig workers fall behind simply because they don’t know how much they need to pay or how to pay their taxes. Set a reminder for yourself so when April 15 comes you are prepared. You can put aside money from each gig work you do.
6. Counting personal expenses as tax deductible
If you’re a newbie in the small business and tax world, you need to know that expenses like phones, cars, travel and entertainment are not deductible expenses. The IRS considers these expenses personal expenses.
7. Thinking it won’t happen to you
Many young self-employed people might believe they aren’t going to be audited. This is because they have fewer years of experience as a freelancer so the chances of being audited is lower. If you’re still new to freelancing, don’t make the mistake of thinking that it’s okay not to pay tax.
Even if you’re new, always build a safety net to ensure you have stable finances to pay taxes and to keep your business running.
8. Not knowing you needed to pay tax throughout the year.
All self-employed or employed contractors are required to send in their tax payments four times a year. If you forget to send your quarterly payments you’ll have a substantial tax bill plus penalties when you file your tax. If you have a problem paying, you can ask for an extension or opt for a monthly payment plan.
9. Not paying tax on time
Failure to pay tax on time may cause your business to receive big tax bills and penalties, plus a 25 percent failure-to-file penalty if you are more than five months late. All businesses have to pay their taxes every April, June, September, and January.
10. Not asking for professional help
When it comes to taxes, don’t take shortcuts. Ask your family or friends who have experience in filing and paying taxes or get a professional tax preparer to guide you. Knowledge in tax management is vital for all self-employed people and will provide you with long-term benefits.
Whether you’re an Uber or Lyft driver, writer or real estate manager, when it comes to tax always dot your i’s and cross your t’s!