If you’ve done any gig work, either to make ends meet or for extra cash, you will probably receive a 1099 this year. You are considered an “Independent Contractor”, which means that you basically employ yourself and bear all of the costs and benefits of that arrangement.

Businesses and online articles sell you on all of the benefits of being a contractor, instead of an employee: “You get to set your own schedule!”; “You can make thousands of dollars on the side!”; “You can be your own boss!” As with most things, there’s always a catch when someone only talks about the upside. Here are several things that you should be aware of when you work as a Contractor:

1.     You’re self-employed and running a small business

You haven’t incorporated, but you have a small business—even if it doesn’t feel like it. When you aren’t the employee of the business you contract for, you are your own “employee”. This means that you bear all of the responsibility that your employer would normally have for your taxes, benefits, and other expenses.

The good news: this isn’t a problem as long as you are aware of it beforehand. No one wants an unpleasant surprise when they file their taxes. With careful planning and impeccable bookkeeping, you can run a very profitable business with nearly zero overhead.

2.     You have to manually pay your own taxes

In my experience helping entrepreneurs with taxes, I saw one problem repeatedly: no one paid any taxes on tens of thousands of dollars in income. Imagine: you didn’t get a stimulus check, so you tried to get it on your taxes, but you end up owing several thousand in unpaid tax from your side business. Luckily, this problem is completely avoidable.

When you are self-employed, you have “self-employment” taxes (basically a business income tax and a social security tax), which are completely separate from your income tax. For 2021, the self-employment tax is 12.4% of your income, and the social security tax is 2.9% of your income. For example, if you make $10,000 as a rideshare driver, you will owe $1,530 in self-employment taxes. Then you will still owe income taxes (which depends on the income that you made overall during the year).

To avoid a multi-thousand-dollar tax bill on April 15, there are two key things that you should do: 1) keep records of any expenses that your business has (more on that below); and 2) you should make estimated tax payments every quarter, or you risk an underpayment penalty from the IRS.

3.     You have to keep your receipts

How do you know if your business is actually profitable? Sure, you bring money in, but you may be losing money overall. If you don’t keep records, then you could be paying taxes that you don’t actually owe, or you may be losing out on money you should get back.

If you have business expenses, then they directly offset your business income. If you make $10,000 in your business, but have $5,000 in expenses, then you only have $5,000 in taxable income—reducing your self-employment taxes by half!

If you keep receipts, your tax professional can help you navigate which expenses are valid to use for the business. But if you don’t keep records, you’re losing out.

Business taxes aren’t always easy to navigate. If you have any questions or want to efficiently plan your taxes then Safeguard Law, PLLC would be happy to help.