Introduction
As the shift from traditional employment to self-employment and business ownership continues, many workers are finding themselves in a brand-new situation. The IRS has noticed the shift to gig work, freelancing, and self-employment, and their auditors and agents are increasingly focusing on those brand-new small business owners.
The audit rate for ordinary individual taxpayers has less than a 1% chance of getting a notice from the IRS. For small business owners, however, the audit rate is on the rise, and if you work in the gig economy, that means you.
The rising audit rate for small business owners is certainly cause for concern.
If you’re being audited by the IRS or if the IRS is claiming you owe $10,000 or more, contact our firm immediately for a consultation.
If you want to stay on the good side of the IRS, these strategies could greatly reduce your personal risk of an audit.
Track Earnings on the App or Platform
One of the biggest red flags for IRS auditors is unreported or misreported income. It is absolutely critical for all gig workers, freelancers, and other self-employed individuals to track their earnings carefully and report them correctly.
Tracking those earnings does not have to be cumbersome, and many participants in the gig economy already make it easy. If you are working for an app-based service, you may be able to find your total earnings on the platform – no calculator or spreadsheet required.
If you’re not, it’s important to track all of your income on something like QuickBooks. That way, when the IRS asks you for more information, you have it ready.
Ask Small Volume Clients for 1099 Forms
A single gig worker can have dozens of individual clients, and that can make accurate accounting and tax reporting difficult. One of the best ways to close this gap is by asking every client to issue a 1099-MISC form showing how much was earned throughout the year.
Major clients may already issue these 1099-MISC forms, but smaller ones may not realize they have this kind of reporting responsibility. Asking them nicely and explaining the importance of accurate reporting could convince them that the form really is required.
Check with Payment Processors for Accurate Figures
Another easy way to keep track of your earnings is through the payment processor you rely on. Services like PayPal, Stripe, and Payoneer allow clients to pay freelancers and gig workers quickly, but they also tally up individual earnings and provide handy reports for those small business owners.
If you are unsure about what to report to the IRS, you can simply go into the payment processor app or website and tally it up. Some payment processors make it easy, with detailed reports, while others require a bit of sleuthing. Either way, you can probably get the information you need this way.
Keep Your Deductions to a Reasonable, Legally Allowed Level
As a gig worker, you are essentially a small business owner, which entitles you to many new tax deductions. From the car you drive to the electricity powering your home office, many things you use daily can be deducted to lower your final tax bill.
The problem arises when gig workers and freelancers get greedy, writing off personal items and services as business expenses and invoking the ire of the IRS in the process. If you want to stay off the tax collection radar, make sure the deductions you claim fall within reasonable limits. Outsized deductions are a huge red flag for auditors, and writing off too much could put you at the top of the list.
Make Your Estimated Payments on Time
If you only do a few gigs here and there, you may not have to worry about making estimated payments to the IRS. But as your business grows, chances are you will be required to make those estimated payments – or face additional penalties down the line.
For those who are required to make quarterly payments, writing those checks promptly is important, so mark your calendar and make sure you set aside enough money to pay the IRS. These quarterly payments are a way of life for the self-employed, and that includes a growing number of gig workers.
The gig economy is growing fast, which is good news for those who long to be their bosses. As more and more employees leave their jobs for the lives of self-employment, the IRS is already taking notice, and that could be bad news for unwary and incautious taxpayers. The tips listed above can help you reduce your risk of trouble so you can focus on building your business instead of worrying about the IRS.
If you’re facing IRS problems and owe $10,000 or more in back taxes or are being audited, contact our tax resolution firm, and we’ll schedule a free and confidential consultation to explain your options and help you permanently resolve your tax problem.
Diving into the world of on-demand work opens up a labyrinth of tax considerations, but did you know there are experts dedicated to navigating these murky waters? Explore What do tax resolution companies do to understand how they can be your ally against IRS audits. And if you’re just starting on this journey, don’t miss our A Beginner’s Guide to Tax Resolutions for a step-by-step approach to securing your financial future.
