Gig Worker Tax Advice from CPAs and Experts

Whether you call yourself a gig worker, freelancer, independent contractor or sole proprietor, one thing is true: you are your own business. However, unlike large businesses and corporations, you probably don’t have access to a high-class suite of accountants to help navigate the tax code and set up accounts.

Whether it’s social security and medicare taxes or determining what is a qualified business income deduction, self-employed workers are often left to figure things out on their own.

Financial planning is key to successfully working for yourself. We’ve gathered together the top suggestions from experts including CPAs, financial planners, and seasoned gig professionals. Read through this helpful CPA advice for gig workers to learn more about maximizing your tax deductions and improving the profitability of your small business.

Incorporate Your Business

Dan Green, Licensed Mortgage Lender and CEO, Homebuyer.ai

The best advice I have for freelancers is this: Incorporate.

When you incorporate your business, you establish an IRS-recognized starting date for your business, and your self-employment, too.

You might not be buying a house today but, when you do, you’ll need to show two year’s of self-employment before you can use your freelance income toward your home loan. The sooner you incorporate, the better.

Exercise Cash Flow Discipline

Marianela Collado, CPA/PFS, CFP®, Tobias Financial Advisors

Being disciplined is key when folks work as independent contractors. When you lack the discipline, these folks will be unpleasantly surprised when it comes to true up with the IRS. I recommend cash flow discipline. With every deposit from contracts and clients, they need to think about breaking up the deposits. I would follow 1/3, 1/3 and 1/3 rule and this can vary depending on overhead and expenses related to each business. And here’s how I would implement it.

1. 1/3 to be saved in the business operating account for upcoming expenses. Whatever that is, you want some cushion for your expenses.
2. 1/3 to be reserved for tax payments due quarterly – how to pay this in depends on their tax situation. A CPA should work to calculate how much needs to be paid to avoid underpayment penalties. A high yield savings account is a good vehicle to set this aside for the quarterly tax liability
3. 1/3 as “salary” or draw for themselves for their personal living expenses. Additional planning could be done here to save for retirement so that they don’t have to work forever

On the tax planning side, there are so many vehicles they can use but being self-employed presents an opportunity to establish retirement savings vehicles that can significantly reduce their taxable income.

1. A Solo 401K is a great tool, they can save up to $19,500 as a “deferral” and add an additional 25% of the net income as a profit-sharing contribution
2. A defined benefit plan may also be a great boost to save a significant amount but the benefits of this will depend on their age.

Take Advantage of Tax Benefits

George Birrell, CPA and Founder, Taxhub

We are a firm that specializes in helping Solopreneurs and Freelancers file taxes. Here are two that we recommend to our clients:

Scour the expiring provisions list provided by Congressional Joint Committee on Taxation. This list is fairly easy to interpret by a non-tax professional. Doing this can give you a lot of new ideas for future spending. It will also give you a chance to review some tax credits that you may have not taken in the past and may still be able to take by amending a past return.
For all Freelancers or contractors, consider whether to abandon worthless (equipment) property rather than just selling it for a nominal loss. The benefit here is that IRS code section 165(a) allows you to take it as an ordinary loss rather than a capital loss which is subject to several limitations.

Normalize Your Income

Rob Drury, Executive Director, Association of Christian Financial Advisor

The easiest way for a gig economy worker to operate is to not operate as a gig economy worker; that is, to normalize his income by paying himself a salary. If he uses a separate bank account for business — and he should, he can simply draw a recurring salary out of that account. The salary should be the lesser of his budgeted expenses, including leisure and entertainment, and a minimum expected income figure. This minimum income figure is a judgment call and can be the absolute minimum that one can expect during a pay period (net of business expenses), or a figure that can be sustained in the face of occasional revenue dips. It may be helpful to attach a revolving credit line to that account if needed to deal with shortfalls. If this is done, however, it is crucial to budget the salary responsibly so as not to overextend one’s credit.

Keep Expenses Separate and Track Your Time

Abir Syed, CPA, UpCounting.com

One recommendation I’d make strongly to any freelancer is to maintain a separate credit card for business expenses. When your time is literally money, you want to waste as little as possible on administrative tasks. Having all your business expenses on a separate credit card will make it much easier to identify your business expenses. This is not only useful for your own profitability analysis and monitoring your business-related cashflow. But also to quickly summarize and reconcile all your business expenses come tax time. You don’t want to spend any time manually parsing out your business expenses from personal on a single credit card. And there are plenty of business credit card options that come with no annual fee.

Another tip is to track your time. Using something a really seamless and free tool like clockify.me can make this really easy. The benefit is that you’ll not only become more efficient, but you’ll identify which tasks of yours take up a lot of time but aren’t that difficult. You can then decide to outsource those tasks as you get busier. You may be resistant to spend money on something you can do yourself for free, but if you can trade low-cost hours for high-cost hours by taking on more work, that’s the only way to scale as a freelancer.

Build up an Emergency Fund

Kathy Kristof, Editor, SideHusl.com

Freelancers have some unique personal finance challenges, not the least of which is that their income can vary dramatically from one month to the next. As a result, it’s pivotally important to build up an emergency fund equal to three to six month’s earnings. It’s also incredibly important to invoice promptly and follow-up when bills aren’t paid on time.

You may also have some unique insurance challenges. If you use your car for commercial purposes — to drive for Uber or Lyft or deliver for GrubHub, for instance — a typical auto insurance policy doesn’t cover you. You may need a commercial lines rider.

On the bright side, where employees are severely limited when it comes to deducting work expenses, almost any expense you incur for work is fully deductible against your business income. That gives freelancers far more write-offs than the average person. You also have plenty of options when it comes to contributing to tax-favored retirement plans and you can contribute a larger share of your income than the average employee.

Plan for Your Retirement

Riley Adams, Licensed CPA, YoungAndInvested.com

Much like anyone else, freelancers should focus just as much on retirement one day. While their pathway might be less clear cut than a W-2 worker with ready access to a 401k or other employer-provided plan (should they be so lucky), freelancers still have the ability to set aside money in tax-advantaged ways. One route available to anyone with earned income is the individual retirement account. Each year, a person may contribute the greater of $6,000 or their earned income. This account can be either a traditional IRA with tax-deferred income placed into an account and taxes levied on the capital gains when sold in retirement or through a Roth IRA where taxes are paid upfront and the contributions grow tax-free.

Another option, should the freelancer have a high deductible health plan and it qualifies for a health savings plan is through setting aside money in an HSA (health savings account). This account allows for tax-free contributions up to $3,500 for individuals and $7,000 for families in 2019 $3,550 and $7,100 in 2020, respectively). These funds enjoy a triple tax advantage: (1) not taxes paid at contribution, (2) none paid on withdrawal (if paid towards qualifying medical expenses, and (3) no taxes paid on capital gains recognized on investments held in the account.

A combination of these two sources is useful for saving money for retirement or shielding your income from taxation.

Additional Resources

Looking for more tips? Check out these articles:

GoShare Inc. and our affiliates do not provide tax, accounting or legal advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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