The American Dream is not just about the perfect home, white picket fence, loving family, kids, and the beloved Golden Retriever. Part of ‘living the dream,’ means achieving some kind of financial independence and flexibility that allows for work-life balance and financial stability. For many hard-working Americans, this might take the form of becoming self-employed, working from home, or starting turning their hobby into the money-making machine they always dreamed of. A Dartmouth study a few years ago revealed that up to 70% of Americans would like to be self-employed.  So whether you are just starting out or have been self-employed for a few years, you know that the tax situation is a little bit different for you. Here’s a list of some key information that will come in handy come tax season and all year round. 

The Magic and Tricks of the Gig Economy 

Let’s take a step back. The economic landscape looks different than it did ten years ago. Heck, it looks different than it did one year ago. A lot of that is thanks to the internet and the changing nature of work which has continued to change since the early 20th century as a result of technological and industrial innovation. In the late 2000s, it was clear that the internet and our way of doing business were moving in a radically shifting direction. The Gig Economy has always existed to some degree or another, but in the second decade of the 21st century, it had become a term that could be used to describe up to 150 million workers in North American and Western Europe.  

In 2016, a report by McKinsey Global Institute revealed that the typical 9-5 for a single employer for a twenty-year career span does not resemble the modern workforce. The report also showed that up to 162 million people in Western Europe and the U.S. engage in some kind of independent work. Independent work is rapidly evolving thanks to digital platforms and the ability of creative teams to work across distances and communicate. The Gig Economy means that more people than ever derive their livelihoods from the income they produce when working for themselves. 

Tip #1 If you are self-employed, discover the freedom in independence and embrace the high stakes 

When you are working for yourself, the stakes are high. You produce or you don’t. And if you don’t, there is no paycheck at the end of it. It’s that simple. So the first words of advice (and this is not exactly tax advice) is to dig deep into how you work and why you work. Experience gig economy workers have relayed similar information across industries:

• Find a routine that works for you and stick with it

• Stay consistent

• Always expand and grow your skills 

So now let’s turn to more tax-based advice. 

Tip #2  Understand that you have self-employment tax obligations and they are not always clear-cut or simple

With great freedom comes great responsibility. And while many folks strive to have the freedom of being self-employed, they often forget that there is an attached responsibility to meet tax obligations. Let’s face it, if you are working in the United States, the government wants part of that money. It is the nature of taxes and that has existed since the earliest civilizations. That being said, just because there is no one holding back taxes for you on your paycheck, doesn’t mean you don’t owe money. 

Tip #3 Take into account your tax obligations when setting your prices and rates 

As an independent worker, there is no one telling you how much you should charge for a certain kind of work. As people first start out in their business, they may charge less to gain experience and clientele. More experienced workers may have more leeway to charge more. And yet, there is no set price rulebook that indicates precisely how much your work is worth. This, you must decide yourself. The market has some say in it too. And as one grows older and has more expenditures such as health insurance, childcare, mortgages, and more, these things will inform how you determine your rates because no one is setting it aside for you. 

Tip #4 Learn about self-employment tax and what that means for you and your income bracket

The government takes a piece of everything you earn, even when you work for yourself. Self-employment tax can sometimes be confused, but it mostly refers to Social Security and Medicare taxes that every individual pays. When there is no employer, however, the individual is responsible for that whole amount. In 2019, the self-employment tax rate was 15.3%. That number is composed of 12.4% social security tax and 2.9% Medicare tax. These taxes apply to your net earnings. 

Tip #5 Talk to a tax expert regarding your yearly tax payments and know the difference between tax deductions and tax credits 

Working with a tax professional is the best way to ensure that your taxes are done properly at the end of the year. This is especially true if you recently started a business, are self-employed, or make more than $400.00 of self-earned income. Even if all your income is not derived from self-employment, you can still take advantage of some of the tax credits and deductions. In order to be properly prepared, however, it is key to know the difference between a deduction and a credit. 

• Tax deductions can lower your taxable income and they also lower the amount of taxes you owe by decreasing your tax bracket. 

• When it comes to tax credits, there are refundable and non-refundable. 

Work With a Tax Expert and Make the Most of Your Hard-Earned Money 

Being self-employed has many perks, but it also comes with unique responsibilities. The good news is that your tax expert at Taxes4Us can help you better understand your tax obligations and requirements when you work for yourself. 

Are you self-employed or work in the gig economy? Call one of our tax professionals and make sure you’re taking care of your finances!