Today’s guest post comes from Danielle Higley, a copywriter for TSheets by QuickBooks, a time tracking and scheduling solution. She has a BA in English literature and has spent her career writing and editing marketing materials for small businesses. Last year, she started an editorial consulting company.
Most days, the toughest part of your job might be getting an anxious passenger from A to B during rush hour and staying cool while your app recalculates to tell you the traffic is getting worse.
During tax time, though, that kind of stress can feel more like an afternoon at the spa compared to compiling your financial statements and filing the correct forms. And here’s the cherry on top: According to recent survey data by QuickBooks Self-Employed, 36 percent of self-employed workers have been audited by the IRS, and 1 in 3 said errors were found.
According to a January 2015 report released by Uber, nearly 1 in 5 of the company’s “driver-partners” are under the age of 30. While 44 percent of taxi drivers are 50 or older, only 24.5 percent of Uber drivers are 50 years old and up.
That’s bad news for many self-employed workers, whose youth may contribute to their likelihood of being audited by the IRS.
In fact, while survey data showed only 11 percent of self-employed workers age 54 and up had been audited, that number climbed to 27 percent for those aged 25 to 54 and skyrocketed to 46 percent for those aged 18 to 24.
Are taxes waiting in your rear-view mirror?
Taxes are complicated, and despite the fact they come around the same time every year, they always manage to take the best of us by surprise. It’s no wonder, then, a third of self-employed workers say they’ve previously gotten behind on their taxes.
From underestimating how much they needed to pay (42 percent) to not being able to afford their taxes (30 percent), self-employed workers face a particular challenge come tax time. Without an employer taking out money throughout the year, many people underestimate just how much they’ve made and, by extension, just how much they owe.
Not realizing how much they made last year can affect how much a worker claims on their taxes — a struggle taxpayers are generally aware of. In fact, only 68 percent of self-employed workers say they report all their income come tax time. One in 10 full-time workers said they report 50 percent or less.
Of those part-time workers who were audited, 50 percent had errors on their taxes, which sounds accurate, given 1 in 5 said they only report 50 percent of their income. This part can be a little sticky, however, given 31 percent of the part-time self-employed workers surveyed said they didn’t make enough to pay taxes.
While correlation doesn’t necessarily mean causation, it’s worth noting 16 percent of self-employed workers are behind on their taxes because they didn’t know they needed to pay them. Perhaps they assumed they hadn’t made enough, only to find out otherwise?
Accountants to the rescue!
According to the QuickBooks survey, 31 percent of self-employed workers are still filing their taxes using paper methods. And if you’re thinking “That must be those old-school workers who grew up with vinyl and typewriters” (we kid, we kid), you’d be wrong.
A greater percentage of workers aged 18 to 24 file on paper than workers aged 55 and over. While 42 percent of self-employed workers over 55 say they use a tax filing software, only 33 percent of workers under 25 can say the same.
Again, correlation doesn’t necessarily indicate causation. But considering 30 percent of respondents say they have trouble filing tax forms correctly, and another 30 percent say they struggle to keep track of the paperwork, it’s possible these younger taxpayers might find some relief by going the digital route or hiring an experienced accountant.
This is something self-employed workers 55 and older already know. When asked, 50 percent of those who used an accountant said that person was “an essential business advisor.” But younger self-employed taxpayers view accountants differently. Among the 28 percent of taxpayers between the ages of 18 and 24 who said they do use an accountant, most said it was because the had never done their taxes themselves, and they didn’t want to start anytime soon.
When it comes to taxes, ignorance isn’t bliss
And ignorance may lead to a hefty fee. According to a 2016 Forbes article by certified public accountant Janet Berry-Johnson, incorrect tax returns generally result in the IRS sending out a Notice CP2000, where they recalculate how much the taxpayer owes, with a request for the difference — plus interest and penalties. Typically, if the error is addressed quickly, and if it is a small one, the IRS does not conduct an official audit. Failing to solve the problem and pay up may prompt the IRS to tack on a failure-to-pay penalty.
It’s worth noting now that taxes are about to change (so if you just started getting the hang of things, prepare yourself for a road less traveled). Interestingly, 1 in 10 survey respondents said they didn’t know a tax reform had occurred, while 1 in 5 said they weren’t sure how it would impact their taxes.
If you’re one of the 28 percent who expects to pay more (or even one of the 27 percent who expects to pay less), do yourself a favor, and don’t wait until April 2019 to start preparing. Heather Cook’s April 2018 blog on Ridester has some great tips for getting organized, as well as some solid tax software recommendations. And if you’re a driver with Uber, be sure to check out this step-by-step guide from Pat that can walk you through the company’s specific tax filings.
Don’t be afraid to stop and ask for directions
As a self-employed worker, you keep a lot of balls in the air. Let one of those balls drop — particularly a big one like income taxes — and you put yourself and the business you’ve built on blood, sweat, and tears, at risk.
It’s true that for most individuals, tax season is over. But as you think forward to 2019 and make plans to accommodate the new reforms, you might consider switching up your game plan. When it comes to taxes, it never hurts to consult an expert, whether that expert is a high-quality tax filing software or a highly qualified accounting professional.