Most Generation Z (Gen Z) self-employed people don't fully understand the nuances of tax laws when reporting their income to the Internal Revenue Service, according to a recent survey. And it could be costing them money.
Ninety percent of self-employed respondents said they didn't know that paying taxes on earnings was required quarterly, according to the survey by Lili, a banking app for freelancers. Failure to make these quarterly payments brings a 0.5% penalty of the unpaid taxes for each month or part of a month the tax remains unpaid, according to the IRS.
Additionally, 56% of respondents said they were unfamiliar with deductions that would lessen their tax burden and save their business money.
"For many small business owners, tax time may seem burdensome and overwhelming," Lili said in a separate report. "Incomplete records, uncategorized expenses and limited time to file tax paperwork all add to the anxiety, leaving them frazzled. And the IRS doesn't make it easy on you. There are hundreds of deductions available for small business owners."
If you have a federal tax bill you can't afford, a personal loan could be one option for paying that debt and avoiding IRS penalty fees and interest. Visit Credible to find your personalized interest rate without affecting your credit score.
New IRS reporting rule would impact more independent workers
The IRS in December announced that it would delay by one year a new reporting rule requiring small businesses and people with side hustles to report income and the number of transactions that were more than $600 made with third-party settlement organizations (TPSOs) like PayPal and Venmo.
Before 2022, the form was only provided if a business made 200 or more third-party network transactions and the total value of those transactions was at least $20,000. The new reporting standard would mean that even occasional side gig workers earning $600 or more will soon be subject to new IRS reporting requirements and face penalties for non-disclosure.
It stands to "disproportionately impact casual sellers" who earned less than $5,000 per year, according to a survey conducted by the Coalition for 1099-K Fairness.
"Many of these transactions involve the sale of used goods that do not create any tax liability whatsoever since the items are often sold for less than what was paid – such as college students selling used textbooks or retired couples selling personal items when downsizing to a smaller home," the survey said.
If you owe money to the IRS and don't have the money to pay your tax bill, you could face penalty fees and interest. A personal loan can be an option for paying your federal income taxes and avoiding those extra costs. Using an online marketplace like Credible can help you find the best interest rate and lender for your needs.
Tips on how to reduce your tax bill if you are self-employed
One way self-employed Americans can keep their tax liability from growing is to file their taxes on time to avoid the penalties and interest that come with missing deadlines. Here are some other steps independent workers can take to help with their taxes:
Track your business expenses
Bookkeeping is essential to keep track of your business expenses, so you can deduct them when filing your taxes. Yet, one in three Gen Zers said they relied on their smartphone notes app to keep track of expenses and receipts, according to the Lili survey.
"Start keeping receipts from the very beginning," Money Smart Latina Founder Athena Lent told Collective, a platform for self-employed people. "Write out every expense you can think of (legit expenses, not Starbucks) and enter them into a software program while attaching a receipt. If you don't have access to software, download them into a Google Drive file."
Consider S Corp savings
It may make more sense for you to elect an S Corporation rather than simply filing as a limited liability company (LLC) if you are self-employed and your business makes more than $80,000 annually.
Restructuring your company into an S Corp would allow you to pay yourself a reasonable salary and pay taxes on that. The additional benefit is that you won't have to make quarterly payments since you'll be filing taxes on an annual salary. Any remaining profits your business makes could be distributed to shareholders or be left in the company.
"Now is the time to consider your business structure to optimize any possible self-employment tax savings throughout the entire year," said Catherine Kauffelt, Collective head of tax compliance.
If you're interested in borrowing a personal loan to help you pay off debt at a lower interest rate, you can visit Credible to compare personal loan lenders and find the right option for you.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at email@example.com and your question might be answered by Credible in our Money Expert column.