Episode 441: Tax Planning for Freelance and Gig Workers

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Thousands of Americans consider themselves self-employed as freelance or “gig” workers, but understanding tax planning comes with that territory. Unfortunately, many do not understand what it takes to correctly pay their taxes, or the consequences of not doing so. The best plan of action is to follow professional legal counsel, prepare in advance, and know what to expect.

What Are Freelancers and Gig Workers?

To understand tax planning for freelance and gig workers, it is necessary to first define these terms and know examples of each.

Freelancers are individuals who are self-employed and often work on different projects for multiple clients. Freelance positions may include those for writers, graphic designers, and illustrators. These people can generally work for several different people or companies remotely and their product’s final form is usually electronic, can be emailed or posted, and often does not have to produce a piece of paper or a tangible product.

A gig worker is essentially an internet-based worker that is not necessarily tied to a location or specific employer. They are typically engaged in some sort of professional work activity that yields an end-product that can be emailed or posted. Some good examples of gig workers could be individuals who publish, draft blueprints, make accounting entries, or make anything that can be put in electronic form, emailed, and assembled anywhere in the country or world.

Regardless of which category you fall into, it is absolutely necessary that you understand tax planning for freelance and gig workers.

What Do Freelancers and Gig Workers Need to Be Aware Of?

Although being a freelancer or gig worker can be a big responsibility in and of itself, tax planning must not take a backseat to the work being done.  If proper tax planning is not taken seriously, Tax Day (aka April 15^th) could be a rude awakening.

When a freelancer or gig worker gets paid, the money usually goes into a bank account. That income is how personal and business expenses are paid. Freelancers and gig workers are then expected to pay self-employment taxes on a quarterly or annual basis and can do so electronically through the Internal Revenue Service.

Some good tips for tax planning for freelance and gig workers include:

1. You need to file your own tax returns and pay your own taxes. One of the most critical things for freelancers and gig workers to be aware of is that they will likely fall under the category of independent contractors, meaning that they are responsible for doing their own tax returns and paying their own taxes. When you are an independent contractor or self-employed, there is no W-2 form, and no client or employer withholding and paying your federal income taxes for you.
2. Know if your state has an income tax. Fortunately, Texas does not have a state income tax on a personal level, so if you do all your work in the state of Texas as a freelancer and gig worker, there is no state income tax consideration. However, some states do have a state income tax, meaning that if a freelancer is doing work for someone in New York, the state will likely want the freelancer to pay the state income tax. This is an issue some courts are still working on today.
3. Influencers and vloggers are considered contract workers. Technically, people in these professions should get a 1099 to account for what money they made in various states or locations. However, not all companies follow this protocol, and it is becoming a legal issue. The IRS is notifying content providers, and some influencers and vloggers are receiving an IRS notice that they have not been properly accounting. This has resulted in an influx of clients from these professions seeking legal counsel on what effect the notification may have on their taxes.
4. There is a benefit to paying your self-employment taxes quarterly. Quarterly tax payments are more advisable because it may enable the individual to avoid penalties. It helps a taxpayer avoid the shock of having to pay hefty taxes all at once on April 15, especially if they don’t have that money.
5. Be able to keep track of your revenue. Put the money you make in a bank account and make sure you get accounting statements so you can figure out how much money you are actually getting paid on a quarterly and annual basis so you can keep up with taxes.

A Word About International Taxes

Depending on the situation, international taxes may apply to freelancers and gig workers. If the person is working internationally, there are additional tax issues to work through. Some countries are havens for internet workers because these countries do not collect income taxes (or at least require relatively low amounts of income tax paid in to that government), and that attracts business to the country. Other countries have high income tax burdens that can make it far more complicated. Either way, a freelance or gig worker must understand the international tax implications for their revenue.

For example, if I am physically residing in and working from the United States, and I do something to get revenue from Japan, it is counted as income in the U.S. It will need to be included in my income whether I receive a 1099 or not.

If I am an U.S. citizen, but reside in Costa Rica and doing the work from there, I am still responsible for income tax to the U.S. government and can be taxed on my worldwide income. While there are tax treaties between large industrial countries which can make international taxes easier to coordinate, international tax considerations can make international freelance and gig work tricky.

In contrast, there are people who are citizens of other countries who do freelance and gig work in the United States. This can also be a tricky situation that may come with transfer pricing issues.

Will the IRS Really Know I’m Making Money If I Don’t Report It?

Although there will be people tempted to make money and simply not declare it, hoping the IRS will not take notice, this is not advised.

The money you make is traceable to an extent. For example, if someone pays for a service, the payor can deduct it on their end. This means there will be some sort of calculation triggered that lets the IRS know that money was made even if it was not reported by the earner. In this modern era, heavy with reporting by payors, the IRS has the ability to monitor payments and look at various other factors (like subpoenaing your bank records) to figure out how much money you are probably making, even if you do not report it.

Bottom line: Report your income. It will be found sooner or later, whether you report it or not.

When it comes to tax planning for freelance and gig workers, the takeaway is to keep track of revenue and deposits, be able to pay for things to run your business so you can deduct them and account for them, and make sure you have a good accountant and tax preparer. If any issues are anticipated or have already occurred, enlist the help of a reputable tax attorney.

By Harold "Hap" May, P.C. on July 26, 2024   /   Uncategorized   /   Leave a comment