Logan Lamarr The gig economy is constantly expanding throughout the U.S., including Kentucky, and more and more people are finding work as gig workers or freelancers. This particular type of employment provides excellent flexibility and independence, but it also brings some unique challenges when it comes to tax preparation.
Freelancers and gig workers are responsible for handling their taxes, unlike traditional employees, which turn out to be pretty stressful. For such people, a Louisville tax accountant can be the knight in shining armor, take off the immense burden of tax preparation, and allow one to focus entirely on the work without constantly worrying about tax management.
For people who want to manage individually or at least to some extent, we are going to provide straightforward guidance through the vital steps to prepare taxes effectively.
Comprehending the Prevailing Tax Obligations
The foremost and essential thing to comprehend for a freelancer or gig worker is the tax obligations, which make it easier to navigate.
Estimated Quarterly Taxes
Unlike traditional employees, whose taxes are deducted before they receive paychecks, freelancers need to estimate and then pay quarterly taxes. That means that such people are supposed to calculate and send payments to the IRS four times a year. Failing to oblige results in interest charges and penalties.
Self-Employment Tax
Gig workers and freelancers ought to pay self-employment tax, which covers Medicare taxes and Social Security. It is in addition to the state and federal income taxes imposed. The currently prevailing self-employment tax rate is about 15.3 percent, covering the employee and employer portions of Medicare and Social Security.
Credits and Deductions Application
Numerous deductions and credits, varying in eligibility, are available to minimize an individual’s total tax burden.
Health Insurance Deduction
Self-employed individuals are allowed to deduct premiums paid for dental, medical, and long-term care insurance for themselves, their spouses, and their dependents. This deduction is particularly beneficial because it minimizes taxable income.
Home Office Deduction
If someone exclusively uses a portion of their home for business purposes, they qualify for the home office deduction. This deduction lets them deduct a portion of rent, mortgage, utilities, and other home-related expenditures. However, the place must be used exclusively and regularly for business purposes.
Keeping Accurate Records Throughout
A significant aspect of adequate tax preparation is keeping accurate records throughout the year.
Keep Track of Your Income
It is vital to keep detailed and precise records of every income source, including payments from tips, clients, and other sources. Many freelancers rely on software like Freshbooks or Quickbooks to track expenses and income.
Record All Your Business Expenses
Freelancers are also allowed to deduct numerous business-related expenses, which significantly reduces their taxable income. Some joint deductible incomes include software, office supplies, travel expenditures, and even a portion of the home if the person uses the home office. Keep detailed records and all the receipts organized to validate the deductions.
Filing Your Taxes
Some crucial aspects need to be adequately considered before or during tax filing.
Opt for the Right Forms
Gig workers and freelancers generally file a Schedule C to report expenses and income. If their financial situations are more complex, such as owning a business, they sometimes need additional forms, too, like Schedule SE for self-employment tax.
Consider Using Tax Software
Numerous tax preparation software programs simplify the entire tax filing process. Such programs help navigate and guide through the process, identify deductions, and ensure the correct forms are filed. Some of these programs are even specifically tailored for self-employed people.
Seek Professional Help with Tax Preparation!
It is recommended that a professional take care of tax preparation. The cost of hiring a professional pays off in the long run. It is minimal compared to the enormous benefits a tax professional brings to the table, including removing a lot of stress from the person and letting the person focus more on the work.
