by Derek Davis and Argel Sabillo
Working in the sharing economy is different from traditional employment. You are now the CEO (Chief Everything Officer) running your own business. You have to pay for your own health insurance and pay 100 percent of the employment taxes, whereas as an employee your employer help pays for these types of expenses. You are also in charge of recordkeeping and filing tax returns for your business, whereas as an employee, the corporation has bookkeepers and Certified Public Accountants (CPAs) to track business expenses and file the quarterly and annual tax returns.
As your guiding light to your role as the CEO, we have listed the top six tax tools that will help you navigate along the way so that you can mitigate overpaying your taxes and protect yourself from future IRS audits. Just like the ridesharing drivers implementing defensive driving skills on the road, you should proceed cautiously when preparing and planning your income tax returns.
1. Get Health Insurance
With the passing of the Affordable Care Act (ACA), all Americans are required to have health insurance beginning January 1, 2014. This tax season will be the first season where people will be penalized if they do not have health insurance. The amount of penalties that will be applied will vary based on the individual’s level of income and his standard exemption amount. The minimum penalty will be set at $95. However, it will dramatically increase in the subsequent following years. It is important to get health insurance as soon as possible to avoid any penalties that may arise. The open enrollment to sign up for 2015 coverage ends on February 15th.
If you did not have health insurance during 2014, don’t worry, there are several exemptions that are available to you. To get a full list of exemptions, check here.
2. Keep Track of Business Expenses
Keeping business receipts is one of the most advantageous way to lower the amount of taxes that you’ll end up paying once tax season rolls around. Unfortunately, it can also be one of the most time consuming process.
Whether you decide to keep the physical receipts or you decide on keeping all of your expenses on an excel log, having proper documentation clearly tracking all of your business expenses will pay off once tax season rolls around.
Here are some of potentially deductible business expenses for the Shared Economy workforce: depreciation of your new ride, advertising, operating expenses, taxes and licenses, meals and travel, and tax preparation fees.
Borne from the frustration and struggles of keeping tax receipts, Tabby Tax is a mobile application that allows you to connect your credit cards and “swipe” if the expenses are for personal or professional purposes. Tabby is free to download and try, to learn more, their website is here.
3. Understand the tax forms and implications
The two most important forms for 1099ers to be aware of (outside of your 1040) is your Schedule C and Schedule SE. The Schedule C is where you report your 1099 income and respective losses. The Schedule SE is used to calculate your self-employment taxes. As a 1099 independent contractor, you will be required to pay self-employment tax AND personal income tax. Often times, this will come as a huge surprise to independent contractors who have not been planning for taxes year-round.
4. It pays to save
Find the right accountant who specializes in your type of work! Tax preparation fees are tax deductible so it is important to spend a little extra money to find the right person to do your work. There are several great free tax deduction tips on the Shared Economy CPA website.
Often times, it is easy to pick a tax preparer based on the price alone. This can get troublesome once you realize how much taxes are due at the end of the year. When picking a tax preparer, ask them about their previous work experience and the types of clients they’ve worked on. If you’re feeling suspicious about their qualifications, it’s better to pass than potentially pay more taxes than are necessary.
5. Estimated Taxes
If you are expected to owe more than $1,000 in taxes at the end of the year and your expected withholding is not enough to cover your tax liability from last year or 90 percent of your tax due this year (whichever is smaller), you are expected to pay estimated taxes throughout the year at four different intervals. But if your total tax covering a 12-month period last year was zero, then you are not required to pay estimated taxes. For your reference, here is the form **LINK*** that you will be expected to fill out to complete your estimated taxes. The penalties for not paying estimated taxes can range from 6 to 8 percent so it’s important to make sure that you’re in compliance to avoid any unnecessary penalties.
6. Request Extensions
The tax deadline is right around the corner, but don’t sweat it. If you need more time to gather your tax documents, request an automatic tax extension to have six more months to file your income tax returns. This does not extend the time to pay your taxes. Therefore, you have to reasonably estimate your tax liability using the information available and pay the amount by April 15th.
If you do not have enough funds to cover your tax liability, you can still request the extension and pay as much as you can to limit the interest you’ll owe. The penalties for not filing and not paying your income taxes on time can be up to 50 percent of your tax liability. For help with filling out the form and extension calculation, contact the Shared Economy CPA.
Derek Davis is Co-Founder of Shared Economy and Tabby Tax. He is a Certified Public Accountant (CPA) with approximately half a decade of professional taxation experience. He joined the sharing economy workforce in late September 2014 to help service the growing need for professional tax consultation. Argel Sabillo is a senior tax consultant at one of the largest public accounting firms in the world. He has over half a decade of corporate and partnership taxation experience in technology and consumer business sectors, and over fifteen years of personal income taxation experience. When he’s not consulting on business tax matters, he’s helping the shared economy workforce on tax compliance and planning.