Like it or not, the United States is rapidly becoming what’s commonly called a gig economy, populated by workers of all ages who for a variety of reasons prefer to work independently on off-staff jobs of varying time lengths.
It’s not for the faint of heart, and that goes for the accounting involved with these gigs, too. In fact, the IRS warns that misclassifying someone as an independent contractor will have tax consequences, including requiring the employer to pay employment taxes for the worker.
Jody Padar, CPA and CEO of Chicago-area New Vision CPA Group, is one accounting professional who has carved out a niche tax practice that focuses on entrepreneurs. As she puts it, “To assume that you will just be the sole proprietor is making the wrong tax assumption.”
Padar, who spoke at the recent American Institute of CPAs Engage conference, offers these additional insights into the intricacies of the gig economy and what CPAs and other tax professionals need to be aware of about this growing business sector.
AW: What tax issues does a beginning freelancer misunderstand the most?
Padar: The first thing freelancers, like any small business, must understand is what type of entity they will be, and those respective tax consequences.
AW: What tax benefits are underused or need to be better utilized?
Padar: Self-employment tax comes to mind and how you would plan for it. Also, there are lots of things you can do as far as retirement planning to reduce your taxes.
AW: What’s the most beneficial tax benefit for freelancers and why?
Padar: It’s not that there’s a beneficial tax that’s so important. It’s the fact that freelancers need to be aware of the tax implications of the income they make and related taxes and plan for it. The biggest issue for freelancers is that they don’t plan. You cannot do tax planning in April; it has to be done in December.
AW: Is there a tax that’ s being considered for the gig economy specifically that hasn’ t yet been adopted?
Padar: Not that I’m aware of. However, just because it’s in the gig economy does not mean that it’s not subject to sales tax depending on what is being sold. Airbnb recently found out it needed to collect and remit sales tax. That seems to be one of the complexities people are unaware of. Just because it’s sold on the Internet doesn’t mean it’s not subject to tax.
AW: Along the same line, what tax or tax issue do you think needs adoption or consideration that so far hasn’ t been?
Padar: I think we need to do a better job of letting people know that regardless of whether you get a 1099 or not, the income you make is still subject to taxation. Most individuals think that if they don’t receive a 1099, they’re not subject to tax. That is not true.
AW: How is the IRS doing in handling freelancers? Is the taxation process streamlined and efficient, or does the agency seem to be in a quandary about how to handle this type of worker?
Padar: The IRS is trying to help freelancers and gig kind of workers with information on their website. (Besides the link above, there are close to 10 links at IRS.gov that deal with the self-employed.) However, it’s probably not enough. Gig economy workers and freelancers should seek the advice of tax professionals in order to make the most of their newly found business income.
This blog post originally appeared on Accounting Web and was reblog and adapted with permission.
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