In either case, the percentage of workers in alternative work arrangements, including independent contractors or freelancers, jumped to 15.8 percent in 2015 from 10.1 percent a decade earlier, after barely budging in the 10 years before that, according to a report by labor economists Lawrence Katz and Alan Krueger.
And for those who recently received a 1099-MISC or a 1099-K in the mail, this tax season has its advantages and challenges. To make the most of it, here’s what to know ahead of April 18:
When are you a freelancer?
“Part of the problem is, many of these people are picking up a side gig, but they don’t necessarily think of themselves as self-employed,” said Peter Burridge, chief commercial officer at Hyperwallet.
“When you cross over into the world of self-employed, all of the obligations are on them to pay self-employment tax and contribute to their own retirement,” he said.
For starters, you’ll owe income tax and self-employment tax since those levies are not being withheld by an employer. However, half of that self-employment tax expense is deductible. Those making over $200,000 a year also have to pay a Medicare surcharge.
In reality, the average income of self-employed business owners is about $25,000 according to TurboTax. Of those with a side gig, nearly half make $2,000 or less a year, just over one-third make between $2,000 and $10,000 and about 14 percent report earnings between $10,000 and $50,000, according to a report by accounting software form Xero.
Even if you earned less than $600 from a side job, you may not receive a 1099 form, but you still have to report the earnings, according to Lisa Greene-Lewis, a CPA at TurboTax .
If you expect to owe over $1,000, you will need to make quarterly tax payments, Greene-Lewis said. If you haven’t done that already, you could be hit with penalties and interest. And keep in mind that for 2017, the first quarterly payment is due this April.
If you have the income to spare, consider setting up a Simplified Employee Pension, or SEP, to save tax dollars, said Lester Law, managing director of planning at Abbot Downing, a boutique business of Wells Fargo. “It’s another way to defer your income,” he said.
You can contribute up to 25 percent of your net earnings to a SEP, for a maximum contribution of $53,000 for 2016, or $54,000 for 2017 – although that max also includes any contributions made to a 401(k), if you have more than one type of plan. And, the contribution to a retirement account qualifies you for a tax deduction (more on a host of other deductions below).
Deduct your business expenses
As a freelancer or an independent contractor, you should be tracking your income throughout the year in order to estimate your tax liability well ahead of the deadline. Burridge recommends keeping separate bank accounts and credit cards for business related activities to have a record of what you are earning and spending.
Any income made over the course of the year can – and should – be offset with work-related expenses. Those expenses you incurred as a result of your side job are deductible, if they are necessary for the business, according to Gil Charney, director at The Tax Institute at H&R Block.
However, 73 percent of freelancers don’t deduct any expenses at all, according to Xero. “That means they are paying too much tax,” Burridge said.
For example, if you use your car, you can deduct your mileage and upkeep, or if you have a home office, you may be able to deduct a portion of the rent or mortgage interest, property taxes and utilities as well as a computer, internet, phone and business-related meals.
Any money spent on advertising, marketing research, a career coach or licensing or registration also counts towards start-up costs, which are all deductible.
Health insurance premiums by self-employed workers and their families can also be deducted, Law said.
Wrap it up the right way
If you are self-employed, there are also more forms that need to be filed at tax time, in addition to the standard 1040.
First, there’s the Schedule SE which helps you determine how much you owe in self-employment tax and then income and expenses should be accounted for on Schedule C, said Napkin Finance CEO Tina Hay.
Schedule C asks for gross receipts, less expenses, to determine your net profit. That net profit amount then goes on your personal 1040 to complete the rest of your return.
Finally, “once you are organized it’s easier to keep track in the year ahead,” Hay said. Open up a banking card for your business, if you haven’t already, and make a retirement savings plan for 2017.
“If you are organized throughout the year it’s much easier than trying to figure it out on April 13,” Law said.
More tax season stories: