The answer to the question “What is the most popular type of work in the US?” is fairly simple. The cumulative answers are self-employment and freelancing. More than half (53%) of the Gen-Z workforce are fascinated by the idea and nature of self-employment. Especially in the aftermath of the global pandemic, the workforce has been thrilled by the idea of doing what they love and are passionate about at their own time and pace. Many employees are steering away from the 9-5 or the long hours and picking up their own gigs, referred to as the gig economy.
What is the gig economy?
This refers to the trend of short-term, flexible, and project-based jobs that can ideally be done over a digital platform. The workers earn through their individual projects, which is also referred to as the gig, rather than traditional full-time employment. The main reason why more and more working professionals are choosing this model for their income is the abundance of flexibility and the balance between the personal and the professional.
While there are many upsides to the gig culture, tax preparation freelancers and self-employed individuals is worrisome.
Key challenges that gig workers face when it comes to tax preparation
The tax preparation process in the US comes with its own set of complexities. While the gig economy presents a plethora of benefits, such is not the case when these workers sit down to file their taxes. And here’s why:
- No employer withholding: Unlike the traditional modes of employment, freelancers and gig workers cannot automatically have their taxes withheld from their paychecks. These traditional methods relieve workers of a lot of added stress. This means that the workers have to set aside a part of their income and be liable for their tax obligations. This can get especially difficult if they do not have a professional accountant’s guidance and structure. When the time comes, freelancers might even find them short of the money they need to save.
- Fluctuating incomes: The problem with tax and gig workers is that they have irregular and unpredictable income streams. Some months they might be flourishing financially and the others might be harder. And this difference could be vast. This also prevents them from estimating and planning for tax payments accurately and on time. Freelancers might have to worry about sudden tax surprises, where they owe large sums of tax money or face difficulties in meeting their financial obligations.
- Regulatory complications: Tax codes are complex across the country. This is applicable even for seasoned professionals. When it comes to tax planning for freelance workers, they are compelled to navigate through various tax rules, deductions, and credits specific to their self-employed status. Understanding the nuances isn’t as easy and analyzing the estimated tax payments is even harder for those without any prior tax knowledge and experience.
- Self-employment taxes: In traditional models, the tax payable is often divided between the employers and the employees. However, in the case of freelancers, they are subject to paying the entire share of Social Security and medical taxes by themselves. This added tax burden can often catch freelancers off-guard. These taxes are often unaccounted for when setting their earning rates and estimating their incomes.
Tax strategy in the gig economy – Wrapping up
There are several challenges to tax planning in the gig economy. Being a part of the gig economy requires a thorough understanding of tax obligations and strategic financial planning. This economy offers a wide range of benefits, but is not devoid of its challenges – tax strategy being the topmost. By maintaining the right techniques, you can help develop a future that works in your favor.
