The 6 most common problems when filing taxes as a self-employed worker

1. I didn’t know I had to pay self-employment taxes

This is a common miss for people who are newly self-employed. Whatever term you use (independent contractor, freelancer, or gig worker) you’ll have additional tax responsibilities when you’re self-employed.

You may be surprised when you file a return and find out that, on top of your income taxes, you’ll owe another 15.3% tax. This is called self-employment tax and it covers Social Security and Medicare taxes. It can result in a large tax bill if you didn’t know about it.

If you were a traditional employee, you’d pay half of this amount, and your employer would pay the other half. As a self-employed person, both are your responsibility. On the bright side, a special tax deduction for independent contractors (self-employed individuals) lets you deduct half of your self-employment tax to offset your income.

2. I didn’t know I had to pay throughout the year

Instead of having taxes automatically withheld (like employees do), self-employed people have to send in tax payments four times a year (called estimated tax payments).

If you didn’t know or forgot about sending in your quarterly payments, the best time to learn about estimated payments is now. But take note: missing these payments for several months may mean you’ll owe a big tax bill plus likely penalties when you file.

If you can’t pay, you can ask for an extension or set up a monthly payment plan (called an IRS installment agreement) when you file.

3. I keep getting behind in paying taxes

Self-employed people sometimes get behind in paying estimated taxes. When they do, they often file and end up with large tax bills they can’t pay.

If you already have a payment plan with the IRS but then file, owe and fail to pay, you could be considered as defaulting on your agreement. You’ll spend more money to set up a new installment agreement, owe more penalties and interest, and interact more with the IRS. If you owe tax on a later return, you can potentially add it to your current installment agreement, but again it is likely more penalties and interest would be assessed.

If your tax bill adds up to more than $50,000, there are other consequences. The IRS may ask for more information about your financial situation to set up a payment plan.

The IRS may also file a federal tax lien, which typically hurts your ability to get credit.

4. I didn’t report cash payments

Depending on the type of job you have, the IRS may receive copies of forms that validate your income — such as Form 1099-NEC or Form 1099-K. However, many small businesses, especially gig workers who operate in cash, are on the honor system for reporting their income.

And with cash-intensive businesses, the IRS has few, if any, Forms 1099 to validate the income. It makes sense then, that every IRS audit of small businesses starts with scrutiny about whether the business reported all its income.

5. I ‘wrote off’ personal expenses and I don’t know what expenses are deductible

This is another major area where the IRS looks at in small business audits. New small-business owners often deduct certain expenses, like cars, cell phones, in-home offices, and travel and meal expenses. But the IRS views many of these expenses as personal (and not deductible) — unless you can prove that the expenses were business-related.

The most important thing to know — not all expenses are deductible. Just because you incur a specific expense, does not automatically mean it is deductible. The expense must be both:

• Ordinary and necessary
• Directly related to the trade or business

Luckily, the right guidance can steer you in the right direction. An expert tax pro can help you find allowable business deductions to reduce your taxable income as a gig worker. Find a tax pro by you.

The takeaway: Keep excellent records.

6. I didn’t file on time (or, at all)

Many small businesses put off filing because they can’t pay their taxes. Procrastinating like this causes many businesses to run up large tax bills and penalties. The failure to file penalty is 5% per month (or partial month) that the return is late, for a maximum penalty of 25%. If you file your return more than 60 days late (including extensions), the minimum penalty is 100% of your unpaid tax or $485, whichever is smaller. As you can see, it’s better to file on time even if you can’t pay right away.

As mentioned above, the IRS receives information about your income through various tax forms. For example, in recent years, the IRS has identified many non-filers with Form 1099-K, which reports payments the business receives from debit/credit cards and third-party processors.

Many online-retail small businesses in particular are now having to reconcile their revenues to this form. Gig economy workers who don’t file taxes and receive this form are experiencing IRS delinquent-filing notices and IRS enforcement actions.

Gig economy taxes are always on: Here’s where to get help

If you’re a business owner, including an independent contractor in the gig economy, taxes should be something you’re on top of all year long.

Start with keeping good records, making estimated tax payments to limit your tax balance when you file, and always filing an accurate return at the end of the year.

— H & R Block