I am not a tax professional, nor am I giving specific advice on any situation. I am merely giving information based on research I have done. Please contact a tax professional for your needs.
These days, many of us are trying to find ways around the old style of working 9-5 and living for our jobs, while missing out on what life has to offer. One of the ways that is available is to become an independent contractor, such as a food delivery person, renting out your home, or driving people around town. We all either know someone who does this for a living or even part time for extra cash, or have thought about doing it ourselves.
Being an INDEPENDENT CONTRACTOR means that you are providing a service through a company, but that they are not telling you what to do or how to do it. Basically, you are working for yourself, making your own hours, and building your own reputation. This is a little bit different than being self employed, as the company you are working for will be keeping track of your basic income. However, even though you are going to be getting paperwork- 1099-NEC-, you still need to be aware of what you are responsible for come tax time.
Just like being self employed, it is important for you to keep very detailed information about several different parts of your job, as you will be taxed as a self employed person. With a regular employer/employee relationship, the employer deducts about half of what you would be responsible for in taxes every paycheck. As an independent contractor or being self employed, you are responsible for that extra amount of taxes, which covers things like Social Security tax and Medicare tax.
TRACKING INCOME AND EXPENSES
This is why it is important to keep very detailed records of not only all of your income, but your expenses as well. According to Doordash’s website, as an example, they only keep track of your base wages. They will not itemize earnings, tips, milestones, bonuses, etc. So, you may receive your 1099-NEC at an amount of $800, but it may not be clear what your true income is.
Tracking your expenses, such as: mileage, vehicle costs, parking fees, tolls, car insurance, your phone plan, anything extra you buy for your customers as a thank you, and even you banking or accounting fees, can lead to big savings on your taxes in the form of deductions to your income. This lowers the amount of money you need to pay taxes on. (See: TAXES: WHAT YOU NEED TO KNOW).
There are plenty of ways to track your income and expenses. Keep ALL paper receipts in a separate tax folder and scan them into your computer as well if you have the means. Use an app such as Quickbooks or any of the others that will easily keep track of all your income and expenses. (Always keep paper receipts even after entering them into an app, in case of an audit). Track your mileage using an app or even a notebook in your car. Create a spreadsheet to keep track of income and expenses. Basically, you can never have enough proof of what you are claiming to the IRS! KEEP GOOD RECORDS!
HOW MUCH SHOULD I SAVE
If you don’t want to be bombarded with a large tax bill at the beginning of the next year, the best thing you can do is start putting aside a percentage of your income every time you get paid. This is easier said than done, and takes some discipline, but after getting a bill from the IRS that makes you panic…it becomes easier (trust me!).
The typical self employment tax amount is estimated for a single person in a lower tax bracket is 15.3%. This doesn’t include Federal, State, or Local taxes. The total amount most people save is 30-35% of your income. This means, if you get $100 a week, you would be setting aside $30-$35 a week to pay your taxes.
An easier way to accomplish this, and something that is most of the time required, is to pay ESTIMATED QUARTERLY TAXES. Estimated quarterly taxes are exactly what the name says: you guess what you are going to be making for the entire year, figure out the amount of estimated taxes owed, divide by 4, and send in those smaller payments by a deadline 4 times a year.
The main advantage to you (and the IRS) is that you won’t owe a large amount all at one time later on. Instead, you are making smaller down payments and your tax liability will be reduced by what you have sent it. If you made more than you estimated, that will be calculated at tax time and you will owe a little. If you paid too much, you will get a refund.
In most situations, you will be required to submit estimated quarterly payments, so make sure you check with a tax professional or even through H&R Block online or Turbotax. These websites will help you determine what you need to do and even help you calculate. If you do not submit estimated quarterly payments, there will likely be a small penalty added to you tax bill in April.
It is awesome that we have so many more options today than our parents did for making income while still having the flexibility to enjoy our lives. While these jobs may seem like easy income, it is important to remember the business aspect of it as well, including tracking all income and expenses and being prepared at tax time. Understanding these steps will help you make better financial decisions overall and will create good money habits in your personal life, as well. (SEE: TRACKING EXPENSES for your personal budgeting, along with BUDGETING BASICS).
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