Shang Saavedra: 2 Tax Mistakes Gig Workers Make (and How To Fix Them)
Millions of Americans now make money outside of a traditional paycheck, like driving for ride-hailing apps, freelancing on the side, or picking up delivery gigs between other jobs. That income seems like a win until tax season comes and the bill is a lot bigger than expected.
Shang Saavedra, personal finance expert and founder of SaveMyCents, said this is one of the biggest adjustments side gig workers need to make when moving from traditional employment to self-employment.
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You don’t have to wait until tax season to fix the problem. A few simple systems can help you pay taxes throughout the year and potentially take legitimate business deductions. Here are two mistakes to look out for when you are self-employed, plus how to fix these mistakes.
Self-Employment Tax
Saavedra points to self-employment tax as the culprit behind most unexpected bills.
"When switching from W-2 to freelancer, there's one extra tax you may not be aware of: self-employment tax," she said.
W-2 workers usually pay half of their Social Security and Medicare taxes, with the other half paid by their employers, while self-employed workers pay the full amount themselves.
The IRS said self-employed workers normally must pay self-employment tax on top of income tax. As a general rule, you must file a tax return reporting your self-employment income if your net income from self-employment is $400 or more.
This means the money that goes into your account is not always money that you can spend as you please. Part of it belongs to the IRS.
Freelance Income Isn't Automatically Taxed
The second mistake is to consider taxes as an annual problem rather than a problem to be dealt with throughout the year.
"You're typically considered self-employed, so you have to actively set aside taxes as you make your income. It's no longer going to be automatically deducted from your paychecks," Saavedra said.
Her rule of thumb is to set aside 25% to 30% of gross freelance income for taxes, rather than thinking of the whole amount as spendable. This will be easier with a separate savings account. As soon as you receive the payment, move the tax portion right away; don’t wait to see what's left over at the end of the month.
Additionally, the IRS wants you to pay taxes year-round, not just in April. Side gig workers who owe more than $1,000 at tax time face penalties if they haven’t paid estimated taxes on time. Saavedra suggests calculating your annual tax liability and breaking it down into four quarterly payments to keep obligations manageable and eliminate the penalty.
The Bottom Line: A CPA Can Help Maximize Deductions
Saavedra recommends working with a tax professional throughout the year, not just around tax time.
"Get ahead of it by working with a great certified public accountant (CPA) to ensure that you’re also taking as many qualified deductions as possible by being self-employed," she said.
Many gig workers miss out on common tax deductions like home office expenses, phone and internet use, business insurance, health insurance premiums and retirement contributions. All of these can significantly reduce taxable income when properly documented.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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