Tax Do’s (and Don’ts!) for Contingent Workers
You may be thinking: oh, uh, wow. What does this mean for me during, say, tax time? Funny you ask! With tax time around the corner, if you’re self-employed, you need to start thinking about such things as self-employment taxes, making quarterly estimated tax payments, and of course, saving for retirement! We’ve collected a few helpful tax tips here to help you out this season, and to remind you that while we commend your independent-working-life… you still have to answer to Uncle Sam. 😉
Self-Employment TaxesWe’ll start this one by reminding gig workers that it’s important to keep personal and business finances very separate throughout the year. It’ll keep all things money simpler, especially around tax time.
That said, most people know that they must pay income taxes on the money they earn. But did you know that there’s another tax for self-employed folks? Yep. Self-employment taxes cover Social Security and Medicare taxes. According to Brett School, CPA, “Gig workers need to know that not only will their net profit be subject to income taxes, but they will also need to pay the self-employment tax of 15.3%.” That means that you can’t just take 100% of your earnings and spend it all. You need to be saving some of it for the taxman—which we cover in more detail in the next section.
But also, there’s some good news! You may be eligible to itemize deductions that are available to freelancers, including a new deduction for pass-through businesses that were implemented as part of the Tax Cuts and Jobs Act of 2017. Take a look at some of these common tax deductions if you’re an independent contractor.
Quarterly Estimated Tax PaymentsWhen you work for a standard employer and receive a W-2, you are subject to income tax withholding. This means you do not need to make estimated tax payments. Simple. Gig workers, however, don’t have it as easy.
“Income received from just about any source is generally subject to income tax. That can include not only federal income tax, but also state income tax, and Social Security and Medicare tax,” reports Money Under 30’s David Weliver. When you work for yourself, you’re liable to estimate your tax payments to the IRS four times per year: on April 15th, June 15th, September 15th, and January 15th of the next year. Many gig workers fail to pay these estimated taxes and come tax time and end up owing a whole lot of money. Yikes.
Do yourself a huge favor and don’t forget about quarterly estimated tax payments!
Saving for RetirementWhen it comes to retirement planning as a contingent worker, the first thing to remember is to, well, not forget that you must still save for retirement! Luckily, there are a few ways to make this happen. For the sake of brevity, we’re going to talk about one in particular… because it’s our favorite and because it is, quite simply, an account with superpowers!
Health savings accounts (HSAs) are the most tax-advantaged way to save for your health and your future. With an HSA, you can save tax-free, spend tax-free on qualified medical expenses, and watch your money grow in your account… tax-free.
Your HSA also works as an integral part of your taxable income reduction strategy. Think about it this way: because contributions to your HSA are tax-free, you can count on that as yet another deduction come tax time. Plus, just like an IRA, you can make those contributions not only through the end of the tax year but up until the filing deadline (usually April 15).
The tax deduction for HSA contributions is the same as an IRA. But unlike your IRA, you can use your HSA funds without any tax penalties for healthcare costs or, after age 65, for non-healthcare costs at the standard income tax rate. In order to be eligible for an HSA, you must also be enrolled in a high deductible health plan (HDHP), and remain aware of the yearly contribution limits. If you’re ready to learn more about HSA ins-and-outs, be sure to read up here.
The tradeoff for the freedom contingent work can give you, you’re also adding new responsibilities to your plate. Being outside of those normal taxable W-2 wages means you’re in a league of your own, tax-wise. Don’t get caught up with the IRS, and pay attention to these tax do’s and don’ts. Then just keep on giggin’!