Here are the top 20 tax tips for gig economy employers to stay compliant for the year 2020-2021 and beyond.
There is no denying that everyone LOVED that 2020 came to an end. If you could hold on to your business or even better; made a profit in 2020, then good for you. We hope 2021 treats you even better.
As excited as most taxpayers are for a wonderful 2021, especially with Covid-19 vaccines rolling out at full speed, there is also a certain apprehensiveness surrounding the New Year.
2020 left us all feeling unsure if 2021 would be any better or would it be 2020.2.0? (Yeah, no one wants that)
To make your 2021 a little easier, we have put together some of the best tips to help you stay compliant in this tax season.
If you don’t already know, the tax season is in a full swing and the 1st of February 2021 is the deadline.
So, if you are a gig economy employer, these tips will come in handy. Not just for 2021, but beyond too.
So, let’s get into the top 20 tax tips for gig economy employers.
1) Pay Estimated Quarterly Taxes on Time
If you’re new to the gig economy, you may not be aware of quarterly taxes. Every gig economy employer who hires other professionals has to pay quarterly taxes for the current tax year (every quarter).
Not paying quarterly taxes on time does two things.
- It results in a massive tax bill in March/April
- It keeps adding on interest on the amount you owe to the state/federal departments
So, be sure to pay your quarterly taxes on time and avoid heavy interest on due.
Avoid Errors On Tax Forms
Be it inaccurate reports or omitted boxes on the forms, do not send incomplete or inaccurate forms to the IRS, especially when there are simple ways to minimize errors and maximize accuracy with a quick search within the official portal of the IRS for step-wise instructions.
Errors, such as entering the wrong social security numbers or incomplete data are surefire ways to get your filings rejected by the IRS. So, avoid them, and have someone qualified to review the forms for you.
Avoid Common-sense Mistakes
You would think with the widespread awareness of the IRS compliance, taxpayers would pay more attention to some basic concepts that are known as ‘common sense’ points.
For example, some taxpayers forget to enter their name, address, EIN/SSN, and some mail the filings to the wrong address (paper filing).
Have a checklist by your side when tax season rolls in and stick to it. Add more steps to make the checklist as comprehensive as you can so that you don’t make such mistakes.
You can also use Tax1099’s recommended checklist for a convenient tax season in 2020-2021.
Don’t Pay Business Taxes Out of Your Pocket
There is a common misconception around paying taxes. Taxpayers often find themselves squeezing every last penny out of their pocket to pay their taxes.
Set aside 25% of the income that you generate every time a client cuts you a check. Repeat this habit every time you receive a check from your client. Save the money in your bank and don’t touch it until the tax season rolls in.
This way, you don’t have to burn holes in your pockets to pay taxes and you will have enough in your bank to pay the taxes and even save some!
Don’t Avoid Paying Dues To State/Federal Departments
If you owe taxes to state or federal departments, don’t wait until the next tax season to process the payment.
As soon as you have enough funds to address the due, call your accounting team and tax specialists to work out a streamlined plan to pay all dues at the earliest.
Delaying dues would do two things:
- It would put you in the bad books of the IRS
- It keeps adding interest to the basic amount you owe to the departments
Keep Copies of Your Filings
Always document every communication that you have with the IRS. This includes keeping a copy of the forms that you file to the IRS and the recipients.
Documenting the copies helps you keep a track of all the payments that you have made and the ones you are yet to make. Under unprecedented legal circumstances, these copies will help fight your case methodically.
Understand State Filing Requirements
Each state has different filing requirements. Understanding these requirements will help you file your tax forms more accurately. Some states don’t require filings for certain forms, while others do.
Some states are specific about the methods used to file the forms, while other states are more lenient. Conduct thorough research before you start preparing your tax forms.
Classify Your Workers Accurately
As a gig employer, it can be tempting to classify your employees as independent contractors. However, it would result in many unpleasant scenarios, such as heavy penalties, legal battles, paying damages, loss of reputation, and even worse, limiting your business capabilities.
So, to comply with the IRS, just classify your workers for who they are. Conduct a simple ABC test and classify them accordingly.
9) Submitting Forms Is Not Equal To Paying Taxes
There have been instances where taxpayers were under the impression that if they just file the tax forms to the IRS, the deal is done and closed. However, that’s far from reality.
Taxpayers are required to file the forms and pay the taxes owed within the specified deadlines to either state or federal departments or both (as required in your case).
10) Don’t Send Duplicate Filings
When you file your tax forms to the IRS, they are not going to respond to you right away. They will take their time to meticulously check each filing to categorize taxpayers as ‘compliant’ and ‘non-compliant’. The review process takes up to a month or even more, depending on the staff availability, business days, holidays, and other factors.
Taxpayers do not have to file their tax forms over and over. This would just further delay the process because the IRS has to check both sets of files and then communicate to you about the outcomes.
The IRS also specifies that if you have filed once, you do not have to file again, unless specified.
11) Avoid Being In The Bad Books Of The IRS
Contrary to popular belief, it is relatively very easy to comply with the IRS and stay in their good books.
All you have to do is report accurately, file before the due dates, follow the good practices of a classified good employer, and don’t leave any taxes pending.
12) Validate The Information On Your Tax Forms For Accuracy
It is really important to report accurate information on your tax forms. Doesn’t matter if you are filing 1099 forms or W-2 forms, it is essential to enter the right information. This includes your personal information, such as name, address, EIN/SSN, state information, and more.
Once you are done entering the information, ensure that there are no spelling errors and the information matches your IRS records.
13) Don’t Mix Up Your Personal And Business Expenses
It’s quite common for gig employers to mistake their business expenses for personal expenses and vice versa. This is because the line of expense differentiation is very thin.
However, a general rule of thumb is that you cannot deduct any payments or expenses that you have made for personal reasons.
For example, if you bought a new mobile device for personal use, then it cannot be deducted because you got it for personal use. However, if you got the device to make business calls, then you can deduct the expense because it’s a business expense.
However, if you bought the phone for personal use but also use it for business purposes, then you can calculate the usage of the phone (example: 30% personal, 70% business), and deduct only the business ratio.
14) Get Extra Help To Claim Your Deductions
Being a gig employer is not easy because most of the time, it’s a one-man show. However, there is nothing wrong with taking some extra help from reliable sources, especially when there is scope to minimize the tax burden by deducting certain expenses or payments.
You can find some affordable tax professionals through mutual connections on LinkedIn, or with your family or friends. You can even score some special discounts if you meet them through friends or family.
Alternatively, you can hire a tax professional for a few hours or a week and have them take care of your tax work for you. Tax professionals are aware of certain loopholes (which are fully legal), which help reduce the tax burden on you.
However, make sure that you never underpay your taxes. Because underpaid taxes usually result in a hefty bill next April (and nobody wants that).
15) Start Saving For Your Future
When we say one-man show, it means not just work. Gig economy employers are on their own. This means that you are in charge of your future (and the lack of).
We encourage gig employers to set aside a small percentage of their earnings for health insurance, fixed savings, and other future-first investments, which render long-term benefits.
Gig employers have to pat themselves on the back and take care of their back.
16) Choose between 1099 and W-2 Employee
As a gig employer, you are aware of your financial resources and capabilities. This helps you understand if you can actually afford a full-time employee or if a freelancer will just do. Lay your options and make an informed decision.
17) Do Not Wait Until The Last Minute To File Your Tax Forms
As soon as the IRS announces the due dates, make sure that you have it on your vision board so you never miss filing your tax forms before the due date.
If you have missed your due dates in the past, then take some time to understand the factors that are delaying the process. If it has something to do with social gatherings or attending special events, avoid those events until you are done filing your tax forms.
Better yet, schedule these events after the due date, so you have something to look forward to once you are done with the ‘tax stuff’.
If the reason is something around not being able to find the required resources, plan your tax season in advance. Book a professional for the tax season at least a couple of months in advance. Tax and accounting professionals tend to be very busy (and very in-demand) as the tax season rolls in.
18) Understand The Taxes You Might Need To Pay
Be it self-employment taxes, social security taxes, Medicare tax, and other taxes have to be paid without a miss to avoid penalties and interest. Speak to your tax advisors before drafting your forms. Or better yet, hire a tax professional to handle these taxes.
19) Be Aware Of The Tax Brackets And Rates
The IRS may change the tax brackets and rates according to the economic status every year. This may result in slight changes in the annual or quarterly rates of tax slab and interest rates.
Before you start preparing your tax forms, be sure to check the IRS announcements on the IRS portal and look for any special notifications on changes to tax brackets or rates.
20) Choose An IRS Compliant e-File Service
There is no denying that doing taxes on your own can become complicated over time, especially when you have other responsibilities that need your immediate attention. It’s always a good idea to have an extra set of hands to take care of your taxes for you.
If you can’t afford a tax professional, take advantage of the IRS-authorized e-filing platform – Tax1099.
It is designed to meet the varying needs of the gig economy businesses and large-scale companies as well, making it the go-to virtual tax assistance tool.
State and federally compliant, Tax1099 brings superior security and accessibility features, which make e-filing extremely convenient.
Integrations like Excel, Entrata, Bill.com, Fresh Books, QuickBooks, and more, make it a must-have tax compliance tool.
Sign up for free to get started (no credit card required)
Do not pay us anything until you decide to submit a form to the IRS.
And when you do, each form will cost you as little as $0.55.
Here’s to a convenient and secure tax season.
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