ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – TIMELY TAX TIPS FOR THE GIG WORKER
By Robert S. Schriebman
The Federal Reserve is telling us that about one in every three Americans is directly or indirectly touched by the gig economy. An overwhelming number of gig workers are young and they are enjoying several levels of freedom. For example, there is freedom from having a boss; you are your own boss. There is also freedom from having taxes withheld from your paycheck. You can make your own hours, and you can accept or reject any assignment or customer. Young people love these freedoms, but unfortunately many live in the here and now and do not think about their future. Looming in the background, however, is the specter of taxes. Too many gig workers are ignorant when it comes to taxes. You may be paying more taxes than you need to.
Back in the 1930s, a famous judge made a profound statement when he said, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934). In other words, you have no legal obligation to give the IRS or the FTB one dime more that you legally have to.
Having said the above, allow me to give you a few basic pointers on how to conduct your gig business affairs.
Don’t Delude Yourself by Thinking You Don’t Have to Answer to the Taxman
IRC § 61 and the FTB equivalent, both say that compensation for personal services must be recognized for tax purposes. If your income exceeds your business-related expenses, you may have to pay some taxes. This is true even if some of your compensation is paid in cash such as tip income. The IRS has free publications that are written in simple English to instruct you and guide you.
It is a mistake to hide taxable income. Taxable income is not just cash, tips, checks, or a credit card receipts. Swapping your services for property or other services does not mean their value is not subject to taxation.
Get Yourself a Knowledgeable Accountant
By knowledgeable account I do not mean the person who prepares your tax returns every year. It is very important to have someone who is experienced in the gig economy and who also has a few tax audits under his/her belt. I recommend a CPA or Enrolled Agent who have experience in working with small businesses and who can advise you on the pros and cons of forming an LLC or a corporation. Most gig workers file tax returns with a Schedule C. This Schedule is usually for sole proprietorships. Most tax audits I see are focused on items of income and deductions on a Schedule C. There are relatively fewer tax audits involving LLCs and small corporations. As I said earlier, there are too many young gig workers living for today and giving no thought for tomorrow. LLCs and corporations allow you to put away more tax-deductible dollars in future retirement plans. Since gig workers rarely have withholdings, and rarely think about retirement, they can get caught in a terrible trap because they do not have withholdings that will give them maximum Social Security benefits.
Focus On Those Deductions
If you are in business for yourself, especially in this current pandemic environment, you may be missing out on some very important deductions. Your home may be your headquarters, in which case you will be allowed to depreciate a portion of your home or a deduction of your rent based on the amount of square footage set aside for your business operation. A portion of your utilities including your cell phone may also be deductible. Your car may be deductible as well as the annual allowable mileage rate. If you wear a uniform or specialized clothing, that too may be deductible. This is why you should retain a knowledgeable tax advisor.
Good Records Are Essential
You do not have to have a degree in accounting to keep track of your expenses. Most Uber and Lyft drivers do not take the time to keep a mileage log. If you are audited, one of the first things the auditor has on his/her checklist is to request a copy of any logs or diaries that will substantiate deductions. If you don’t have this documentation, you may lose a very substantial deduction and pay more takes than you should. IRC §§ 162 and 274, together with their respective regulations are of key importance here.
It is very important to develop the habit of keeping a contemporaneous mileage log or diary. This habit needs to be developed so you do this on a daily basis. If you are an Uber or Lyft driver, ideally you should keep the log in the vehicle and make an entry as soon as the customer leaves the vehicle.
Make Those Pesky Quarterly Estimated Taxes
If you work for someone else as an employee, the law requires that taxes be taken out of your paycheck and remitted quarterly by the employer to the IRS and EDD. However, if you are working for yourself, you may not be disciplined in paying your quarterly estimated tax payments. You are your own employer. In order to be eligible for Social Security and other benefits, you must file and pay estimated taxes. If you fail to do so, you may be facing some stiff penalties too.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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