Taxes 101 for self-employed
Are you a recent Uber, Lyft, Instacart, or Postmates Independent Contractor? Maybe you recently set out to be your own boss as an independent photographer, wedding planner, designer, musician, handyman, or real estate agent? Well, whether you think of yourself as an Independent Contractor, Self Employed, or Solopreneuer, filing taxes is something you’re going to have to deal with.
We know taxes are a major pain to think about, but it’s well worth it. The difference between a freelancer who stays on top of their taxes and someone who doesn’t can be thousands of dollars a year. Did you know that for every 1,000 miles you drive you can claim up to $545 as a business related expense?
How the IRS Views Freelancers and their taxes
The first step to understanding your taxes as a freelancer is is to see yourself from the government’s point of view. The IRS sees you as self-employed and as far as they are concerned, you should be paying tax just like a larger business does. This means that you’ll be expected to pay taxes on the profit of your business and to have enough money saved up to pay the government when taxes are due.
When it’s time to pay your taxes, the revenue you’ve earned throughout the year isn’t likely to change — this is the total you’ve received from clients or through a labor platform such as Uber, Lyft, Postmates, etc. You may be issued a 1099 MISC, 1099 K, or other tax document and the government will likely already have a copy. However, the burden of what you claim for expenses is on you. For example, imagine you had two freelancers: Alex and Sarah. Alex and Sarah both earned $40,000 and spent $10,000 on gasoline and other business related expenses. The take home cash profit of both is the same at $30,000, however Alex didn’t record very many of his expenses and files with a taxable income of $36,000 whereas Sarah kept meticulous records and files with a taxable income of $30,000. Sarah’s tax bill will likely be $1,000 + lower than Alex’s.
The process of recording expenses and paying taxes as a freelancer is already confusing, but made worse by the fact that the platforms intentionally avoid giving any tax advice in order to avoid approximating an employer-employee relationship (in other words, as an independent contractor, they cut you a check for the work you do and everything that comes after that is on you). Taxes can be so complicated that the majority of part-time contractors hire expensive accountants to make sure they are filing correctly.
You should also know that as an independent contractor your chance of being audited by the IRS is significantly higher than the average person. During an audit the government can ask for up to 6 years of documentation for your expenses.
Everlance‘s mission is to enable people to pursue working for themselves by making this process as easy as possible. Everlance is like having a bookkeeper in your pocket and through the app you can start tracking all your miles and other business related expenses. The more expenses you keep track of, the less you have to pay in taxes. Everlance also stores a digital receipt of all your transactions and mileage in the cloud so you can sleep well at night knowing you have all your records organized and saved in a safe place.
What can Freelancers Deduct on Taxes?
What qualifies as a business-related expense? It depends on how you make a living. For example someone earning money driving for Uber might claim mileage, cell phone accessories, or their mobile phone plan.
When you first sign up for Everlance, you’ll get the chance to select all your revenue sources. In addition to automatically tracking your mileage and allowing you to input your revenues and expenses, Everlance also provides an intelligent overlay of potential qualifying business related expenses depending on what type of Freelancer you are. We still have a lot of work to do on this front, but by telling us you earn income from Uber we can suggest expenses you might not think to claim such as a cell phone accessory, or your mobile phone plan. These expenses can add up over the course of a year for some users to well over a $1,000.
If you’re an Uber driver you might be wondering — doesn’t Uber track my miles for me? Actually Uber and other rideshare platforms only track your miles when you have a passenger. If you’re only claiming these miles, you’ll likely be leaving a significant amount of money on the table as you won’t get credit for the miles you drive to pick up a passenger or go to the gas station.
Vehicle Related Expenses: Standard Mileage Method vs. Actual
For many freelancers, the majority of their expenses are vehicle related. For your car related expenses, the IRS wants you to either add up every possible expense related to your car, which is referred to as the “Actual Expense” method or to claim a preset amount for each mile you drive as an expense, which is referred to as the “Standard Mileage Rate.” Actual Expenses include gasoline, maintenance, repairs, car washes, registration fees, and anything else you can think of. The Standard Mileage Rate is set each year by the IRS and is supposed to account for all car related expenses in 2015 this rate was $0.575 per mile so if you drove 10,000 miles for your business that’s $5,750 worth of expenses you do not need to pay taxes on!
In order for Everlance to work, all you need to do is tell the app which miles were business related and which were personal. Do this by swiping left for personal or right for work. You can also disable the automatic tracking feature and manually input your miles, although for documentation purposes (proving to the IRS) the automatic method will provide you with a digital receipt of your trip.
As an On Demand Economy partner (Uber, Lyft, Doordash, TaskRabbit, etc.) or solopreneur, there will be many other expenses outside of mileage that you’ll incur in your line of business (paint for an artist, nails for a handyman, etc.). The underlying premise the IRS will use to assess whether an expense is legitimate is whether it is deemed “Ordinary” and “Necessary” for your line of business. You can read more on their guidelines here. In the example presented earlier, a driver claiming a cell phone accessory as a business related expense would likely justify the expense by saying it is both Ordinary and Necessary for her line of business (passengers expect an amenity like a cell phone charger and other drivers provide the same service). It would be much more challenging to justify purchasing an Xbox for passengers.
We know this has been a super long post, but congratulations you’ve made it through! As usual, feel free to write in to us with any questions you might have to firstname.lastname@example.org.
Disclaimer: the above is written in general guidance and does not constitute professional tax or legal advice.