The American Dream is not just about the perfect home, white picket fence, loving family, kids, and the beloved Golden Retriever. Part of ‘living the dream,’ means achieving some kind of financial independence and flexibility that allows for work-life balance and financial stability. For many hard-working Americans, this might take the form of becoming self-employed, working from home, or starting turning their hobby into the money-making machine they always dreamed of. A Dartmouth study a few years ago revealed that up to 70% of Americans would like to be self-employed. So whether you are just starting out or have been self-employed for a few years, you know that the tax situation is a little bit different for you. Here’s a list of some key information that will come in handy come tax season and all year round.
The Magic and Tricks of the Gig Economy
Let’s take a step back. The economic landscape looks different than it did ten years ago. Heck, it looks different than it did one year ago. A lot of that is thanks to the internet and the changing nature of work which has continued to change since the early 20th century as a result of technological and industrial innovation. In the late 2000s, it was clear that the internet and our way of doing business were moving in a radically shifting direction. The Gig Economy has always existed to some degree or another, but in the second decade of the 21st century, it had become a term that could be used to describe up to 150 million workers in North American and Western Europe.
In 2016, a report by McKinsey Global Institute revealed that the typical 9-5 for a single employer for a twenty-year career span does not resemble the modern workforce. The report also showed that up to 162 million people in Western Europe and the U.S. engage in some kind of independent work. Independent work is rapidly evolving thanks to digital platforms and the ability of creative teams to work across distances and communicate. The Gig Economy means that more people than ever derive their livelihoods from the income they produce when working for themselves.
Tip #1 If you are self-employed, discover the freedom in independence and embrace the high stakes
When you are working for yourself, the stakes are high. You produce or you don’t. And if you don’t, there is no paycheck at the end of it. It’s that simple. So the first words of advice (and this is not exactly tax advice) is to dig deep into how you work and why you work. Experience gig economy workers have relayed similar information across industries:
So now let’s turn to more tax-based advice.
Tip #2 Understand that you have self-employment tax obligations and they are not always clear-cut or simple
With great freedom comes great responsibility. And while many folks strive to have the freedom of being self-employed, they often forget that there is an attached responsibility to meet tax obligations. Let’s face it, if you are working in the United States, the government wants part of that money. It is the nature of taxes and that has existed since the earliest civilizations. That being said, just because there is no one holding back taxes for you on your paycheck, doesn’t mean you don’t owe money.
Tip #3 Take into account your tax obligations when setting your prices and rates
As an independent worker, there is no one telling you how much you should charge for a certain kind of work. As people first start out in their business, they may charge less to gain experience and clientele. More experienced workers may have more leeway to charge more. And yet, there is no set price rulebook that indicates precisely how much your work is worth. This, you must decide yourself. The market has some say in it too. And as one grows older and has more expenditures such as health insurance, childcare, mortgages, and more, these things will inform how you determine your rates because no one is setting it aside for you.
Tip #4 Learn about self-employment tax and what that means for you and your income bracket
The government takes a piece of everything you earn, even when you work for yourself. Self-employment tax can sometimes be confused, but it mostly refers to Social Security and Medicare taxes that every individual pays. When there is no employer, however, the individual is responsible for that whole amount. In 2019, the self-employment tax rate was 15.3%. That number is composed of 12.4% social security tax and 2.9% Medicare tax. These taxes apply to your net earnings.
Tip #5 Talk to a tax expert regarding your yearly tax payments and know the difference between tax deductions and tax credits
Working with a tax professional is the best way to ensure that your taxes are done properly at the end of the year. This is especially true if you recently started a business, are self-employed, or make more than $400.00 of self-earned income. Even if all your income is not derived from self-employment, you can still take advantage of some of the tax credits and deductions. In order to be properly prepared, however, it is key to know the difference between a deduction and a credit.
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Tax deductions can lower your taxable income and they also lower the amount of taxes you owe by decreasing your tax bracket.
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When it comes to tax credits, there are refundable and non-refundable.
Work With a Tax Expert and Make the Most of Your Hard-Earned Money
Being self-employed has many perks, but it also comes with unique responsibilities. The good news is that your tax expert at Taxes4Us can help you better understand your tax obligations and requirements when you work for yourself.
Are you self-employed or work in the gig economy? Call one of our tax professionals and make sure you’re taking care of your finances!
The year 2020 looked a tad bit different. In terms of finances, people had to make last-minute changes, draw out their savings, look for new employment, or find ways to make ends meet. Some businesses had to scramble to keep cash flow running, and others had to adjust the budget for unexpected expenses and infrastructure additions. Certain self-employed individuals were also left in the dark regarding unemployment or loss of business. There is still about a month left of the 2021 tax season and a lot of questions regarding this year's tax filings. So here is what you need to know.
The 2021 Tax Season Has Arrived and Proving Itself to be Pretty Interesting
This year involves a milieu of new tax considerations. From stimulus payments to PPP loans, unemployment benefits, to the shift of work-from-home models. Common questions regarding this year’s tax return include:
Are My Unemployment Benefits Taxable?
With millions of Americans facing unemployment for some or all of the duration of the pandemic, unemployment checks were the main source of sustenance. According to some estimates, up to 6 million Americans were filing for unemployment per week. Especially people that worked in service industries like restaurants, bars, and other establishments that faced harsher restrictions and closures. So is that income taxable? The short answer is yes. Unemployment insurance is considered taxable income.
Are Stimulus Checks Taxable Income?
The U.S. government sent out two stimulus checks during the 2020 tax year. Unlike unemployment checks, stimulus payments are not taxable income. The IRS announced on Feb 16th— shortly after the 2020 tax season opened for business— that all first and second stimulus checks had been sent out. So, if you did not receive yours and were eligible, you might be able to claim it on your return.
If you experienced certain life changes, you may qualify for additional funds
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Your income declined considerably in 2020 compared to 2018 and 2019
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You had a child before the date of Dec 31, 2020
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You adopted a child under the age of 17 by Dec 31, 2020
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It was the first year you were no longer considered a dependent
Other Important Things to Note About This Year’s Tax Changes
Anytime the economy shifts, it experiences depressions, inflations, and everything in between. This will cause tax brackets to shift some. There were slight adjustments to the tax brackets this year, so make sure to pay attention to whether you have been moved from one tax bracket to another.
When it comes to itemized deductions, a few remaining numbers to point out:
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Medical and dental expenses: You can only deduct medical and dental expenses that surpass 10% of your Adjusted Gross Income.
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State and local taxes: Deductions for these taxes remain unchanged. They are limited to $10,000 or $5,000 for married people filing separately.
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Home Mortgage Interest: You can file for acquisition indebtedness for funds used to buy, build, or improve your home. The amount is up to $750,000 to $375,000.
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Charitable Donations: This number remains steady at 60% of cash donations to public charities.
How To Move Forward and Embrace Personal Finance Tips in 2021
Aside from notable changes in tax filing, people are also eager to know how to move forward and recalibrate. Whether you suffered a major blow to your income in 2020 or not, people have suddenly been jolted awake to the need to be prepared. We’ll be reviewing personal finances tips in the future, but here are a few to begin with this year:
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Regardless of your age, start saving for and thinking about retirement. Whether that means opening an IRA or other type of account, this is a worthy pursuit. The earlier the better.
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Take advantage of the student loan interest hold. The hold on student loan interest has been extended until September. Use this to your advantage depending on your situation.
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Watch credit card debt, but keep an eye on your credit. Building credit is important when it comes to getting a car loan, applying for a mortgage loan, etc. So while you don’t want to get your credit spending out of control, using it to leverage some credit building can be a smart idea.
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Try to pay off debt. If you’re in a position to do so, consider taking a bite out of your debt by making sacrifices now.
Work with Tax Experts on Your 2020 Tax Filing
There’s a lot to think about when it comes to finances in these difficult and still somewhat uncertain times. Whether you have an easy tax situation or a more complex story, Taxes4Us is here to guide you towards optimizing your tax opportunities. There may be credits you qualify for that can make a difference.
If you’re looking for a trusted professional to do your taxes right. Work with Taxes 4Us. Our mission is honest and efficient tax preparation and tax filing. Call us today.
Whether we like it or not, credit plays an oversized role in how we interact with each other and the world at large. From an early age, we’re taught to worry about this three digit number and its effect on our dreams and aspirations.
Unfortunately, millions of us fall into the trap of poor finances or decision making and witness our credit scores sink. Credit scores are incredibly easy to ruin but are much harder to bring back up to good standing.
What Even Qualifies As A Good Score?
The first step to improving your credit is understanding what you should be aiming for in the first place. Generally, a score from 580 and above is considered ideal. A score of 800 and up would be considered excellent, but even the most financially-responsible among us may struggle to attain such a lofty score.
If your score is below 580, then you have serious room for improvement. Even if you are above 580, improving your credit could make your life easier and actually save you money down the line.
Make Sure Your Credit Reports Are Accurate
The very first step that you should take when trying to fix your credit is to double check your score. Certain sites will report erroneous scores just to get money from people, which can mess people up when they go to apply for a loan, credit card, and more.
As you do your research on your credit score, be sure to consult various sources to verify your score. If need be, go directly to the three credit agencies and request your score and credit information. That way, you can know exactly where you at and what needs to be done to get to a solid score.
Pay Bills On Time
This may seem obvious, but not paying bills on time is a surefire way to tank your credit. By simply paying your bills on time, you can keep your score from going down and even raise it. While this won’t exactly make your credit shoot up overnight, it can keep your score from tanking any more and can raise it over time.
Lower Your Credit Usage
Your credit usage rate (also known as credit utilization) is another major factor in determining your credit score. The usage rate is basically a ratio between the amount of credit you are using and the total amount of credit available to you. Ideally, you want this percentage to be 30% or less.
If your credit utilization rate is higher than this, then you should work to reduce it by paying off debts and not adding to it. 30% should be the goal you aim for, but lowering your usage by even small amounts could help your credit score improve.
Higher Credit Limit
To help with your credit utilization rate, you could also look into asking for a higher credit limit. With a higher credit limit, you can change your credit ratio and subsequently lower your credit score.
Of course, if you feel like this will tempt you to take on even more debt, then this piece of advice may not be for you. This tip does work wonders, though, so try your best to build the discipline to increase your credit limit.
Keep Credit Cards Open
If you’ve actually paid off your credit card, don’t rush to close out the account. Closing out your account could alter your credit history, which is a major factor in the calculation of your credit score.
Especially if it is an older line of credit, you should be sure to keep it open. Closing an older line of credit will more than likely lower your credit score somewhat. Of course, if you feel like you may be tempted to use that credit, then it may be better to close the line.
Be Patient
In our age of instant gratification, people tend to expect their credit score to shoot up in a week or two. This definitely can happen, but it’s exceedingly rare for credit scores to drastically improve.
Instead, your credit score improvement journey will probably take at least a few months to start showing serious benefits. It’s crucial that you are patient and steadfast in your credit repair journey, even if your scores seem to barely change. If you follow the tips above, then you will see your credit improve.
Trust Taxes4Us For Your Financial Needs
Having a low credit score shouldn't stop you from achieving your dreams. At Taxes4Us, we have top-notch credit score management to help you get back on your feet and thrive in the long-term. Contact us today to learn more!
