With the exploding sharing/collaborative/on-demand economy (think Uber, Task Rabbit and Airbnb) and many new people getting 1099 forms, this is an area of increasing confusion for the newly self-employed – and an opportunity for you.
In fact, a Freelancer’s Union survey reports that one out of three workers is a freelancer or contractor – that’s a total of 53 million people now in the United States alone. In addition, an Intuit® survey revealed that 43 percent of the self-employed use an accountant and spend a disproportionate amount of their income with an accountant, mostly on tax prep.
This new breed of independent contractor may need the assistance of an accountant more than they realize because they may not understand the financial implications down the road. Tax and financial planning can greatly help these freelancers avoid some hidden surprises.
An Uber driver, for example, may not realize that his or her automobile repair and maintenance expenses could increase substantially and should set aside some income accordingly. In addition, in the first year of the venture, the freelancer may not set aside money for quarterly estimated taxes and could be hit by a surprise tax bill, including 15.3 percent of payroll taxes, at year end.
To help make your life and your 1099 clients’ lives a bit easier come tax time, here are some tips, time savers and best practices for them to follow:
- Be sure to document expenses and retain any receipts. It may be helpful to establish and keep separate bank and credit card accounts earmarked especially for income and expenses attributable to the business.
- Retain any Form 1099-Miscellaneous documents which capture taxable income and are also reported to the IRS.
- Keep a vehicle log book that documents business and personal miles driven or look for software that can log these miles.
- Consider establishing a retirement account, such as an IRA, SIMPLE or SEP plan.
- There are several options when deciding what type of entity to create for the business (such as a sole proprietorship, limited liability company, partnership or corporation) and various factors that may affect the decision to change your business entity type.
Additionally, here are some of the tax-saving tax deductions that your 1099 clients may be eligible for:
- Startup costs: If your client has a newly formed business, they may be able to deduct startup costs, including legal fees, cost of experimentation and advertisements.
- Vehicle expenses: In addition to the mileage deduction and other expenses, your client may be able to deduct the cost of their car up to $25,000 for cars and SUVs.
- Home office deduction: If your client has a dedicated space used only for business in their home, they can deduct a percentage of home expenses, including mortgage payments, utilities and property taxes.
- Supplies and equipment: Office supplies, from paper to computers – even snacks for customers – may be tax deductible if used exclusively for business.
- Health insurance premiums: Your client may be able to deduct what they pay for medical insurance for them and their family without having to itemize their tax deductions or being subject to the threshold limits that W-2 employees are subject to.
- Social Security and Medicare taxes: Self-employed workers must pay the entire 15.3 percent Social Security and Medicare tax, but they get a break by writing off half of what they pay.
So, what’s the current tax preparation process like for your 1099 clients? Do they come to you with a shoebox full of receipts and no real idea of what they spent, the miles they’ve driven for work, or what they can deduct? Feel free to post comments below or via your own blog post on the issue. Let’s get the conversation going.
This article first appeared on AccountingWeb.