How to File Your Taxes in the Gig Economy
The term “gig economy” might be new, but the phenomenon isn’t. We used to call it “moonlighting.” And during the recession that started a decade ago, many displaced workers turned to part-time gigs for extra income. In many cases, these odd jobs have turned into full-time self-employment opportunities.
The internet, aided by innovative entrepreneurs, has made it easier to pick up a side gig very quickly. Think eBay, Etsy, Fiverr, Lyft, TaskRabbit, and Uber—companies that have built structures to support artisans, secondhand merchandise dealers, odd-jobs entrepreneurs, and drivers, for example.
These newly self-employed individuals quickly face an unfamiliar bookkeeping challenge: tracking business income and expenses and filing income taxes on self-employed income. So, a handful of established tax preparation companies, including Intuit, H&R Block, TaxAct, and TaxSlayer, have created specialized versions of their services for the gig economy crowd.
In the standard editions we reviewed this year, tax preparation services focus on personal tax issues common to employees. They help you record traditional income from employers (W-2s), financial institutions (interest and dividends), and government or private industry (retirement income like Social Security and pensions). They also help you track down every possible tax-deductible expense including mortgage interest, charitable contributions, and child care costs.
Self-employed people need to report many of the same tax items, but they must additionally file a Schedule C and pay the dreaded self-employment tax. These issues can be complex and some people might need extra guidance when they record their business income and expenses. Tax preparation software companies provide that capability and help in their self-employment versions. These versions also tend to be the most expensive editions—you need to pay anywhere from $40-$119.99 for federal, with an additional charge for state returns. On the plus side, these versions support all major IRS forms and schedules.
There’s one site for that money gotcha does not apply. Credit Karma Tax, now in its second year, helps you prepare and file your federal and state taxes at absolutely no charge. This includes support for the Schedule C.
What’s the catch? The site doesn’t offer nearly as much guidance as its paid competitors, and its navigation system isn’t overly helpful—two big drawbacks for a personal tax preparation solution. If you can live with those things, though, it’s worth checking out. In fact, you can prepare and file any of the IRS’s most commonly used forms and schedules on the site. If you’re working in gig economy, there’s a good chance that every dollar matters to you, so Credit Karma Tax may be the best choice for you, despite it not winning our Editors’ Choice award—an honor that goes to Intuit’s TurboTax this year.
How They Work
Tax preparation services are basically giant step-by-step wizards. They ask you tax-related questions and you answer them, advancing through the site until you’ve covered everything relevant to your situation. Along the way, they offer help in a variety of ways. When you’re done, they review your return for errors and help you file. You don’t have to pay until that point, so you can always try before you buy.
At some point in this virtual interview, it asks if you have income and expenses from self-employment. This is where the site will ask a lengthy series of questions whose answers will eventually appear on your Schedule C. You don’t see the actual IRS document while you’re working; all calculations and placement of numbers and other data takes place in the background. You only see clearly worded questions or statements that you respond to by filling in blank fields, selecting from lists of options, or clicking on buttons.
The ability to prepare and file a Schedule C is not the only advantages of these gig-economy focused versions. Each has its own extras for that group of taxpayers, including content built into the interview aimed at educating users on relevant topics.
Much of the information you provide is generic and applicable to most businesses. These sites might ask you to supply a business description and code, for example. Other questions may be more specific. Do you carry inventory? What accounting method do you use? Did you receive a Form 1099-MISC? What was the total of your self-employment sales?
If you’re using TurboTax Self-Employed, for example, you’ll find that the site may already know something about your type of gig (if it’s common enough). It will go ahead and make some assumptions based on that, saving you a lot of of wizard-driven work and decision-making. You have only to modify or approve what’s there.
You continue to receive specialized guidance as you continue to enter income and expenses, which comprises the bulk of your Schedule C. H&R Block’s Self-Employed Online offers the H&R Block Business Partner, which steps in and tailors the interview based on income and deductions common to your particular profession.
Many small businesses need to record similar types of data when it comes to deductible expenses, things like advertising, office supplies, and computer equipment. Self-employed individuals may have others, in addition, depending on the kind of work they do. TaxAct Online Freelancer offers its own Deduction Maximizer feature that provides extra assistance in areas like vehicle expenses, equipment rental, home office, and self-employed retirement plans.
You don’t have to spring for TaxSlayer Self-Employed to complete and file a Schedule C. TaxSlayer Classic supports that option, as well as all other major IRS forms and schedules. If you pay the for the self-employed edition, you get additional personal guidance, including chat and priority support, as well as access to tax professionals.
This extra help that these versions provide for self-employed taxpayers complements their existing support resources. This is such a critical element of online tax preparation and filing—especially when you’re dealing with the financial workings of a small business. The IRS has its own red flags, tax situations that may trigger an extra dose of scrutiny. Many of these can be found on the Schedule C. Even if you’re not audited, you can face penalties for inaccurately reporting income and expenses.
Keep in mind that the help tax websites offer is limited to questions about the actual tax preparation process (such as site operations and where to enter specific types of data). In other words, support staff cannot act in the capacity of a Certified Public Accountant (CPA). Representatives cannot provide actual tax advice or professional counsel.
Each tax prep service has its own unique blend of assistance. Generally, the more you pay for an application, the more comprehensive its help. Even these sites’ mobile versions manage to pack a lot of support into the small screens. Check out our roundup of the best mobile apps for filing your taxes.
There is a wide variety of kinds of help you may encounter, depending on which service you use. You might notice that some terms and phrases contain hyperlinks that take you to simply worded, clear explanations of the current topic. There could be a question mark or a Learn More link next to a question that does the same thing. Or you might see context-sensitive Q&As or a related statement off to the side that links to more information.
Every tax preparation service has a database of educational income tax content that you can search for topics, phrases, or even IRS form or schedule numbers. The best applications return numerous hits for your queries (depending on the specificity of your search), with the most relevant at the top. Sometimes these sites rewrite articles or brief explanations in simpler terms, though other times they leave you at the mercy of the IRS’ arcane language.
If you’re still stumped after consulting local resources, you may be able to send an email or chat live with support staff. Some companies also allow phone calls. TurboTax’s SmartLook feature lets you initiate a video hookup with a trained team member who can see your screen and provide assistance. TurboTaxLive contains everything in Self-Employed; it connects you to a CPA or an Enrolled Agent (EA) via live video feed who can offer tax advice and a final review of your return.
Documenting Your Tax Year
We all want a bigger refund, and using the right version of the right tax software is a key step in making that happen. Keep in mind, however, that tax preparation websites can’t help you with the daily recordkeeping that you must do as a self-employed individual. For that, you might consider an online accounting service for freelancers, such as Intuit QuickBooks Self-Employed or GoDaddy Bookkeeping.
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