On-demand work is a rapidly growing alternative to the 9 to 5 job, and companies such as Uber, Airbnb and GrubHub are effectively reshaping the economy. Workers can set their own schedule, work a variety of jobs at the same time and find specific work in their area of expertise. While this kind of work provides flexibility and freedom that a traditional job cannot always provide, on-demand workers are considered to be self-employed in the eyes of the IRS. This means they must track their business (side-gig, on-demand work) finances separate from their personal finances, and submit quarterly estimated tax payments to the IRS.
Self-employed clients are busier running their businesses than thinking about tax – and often, they are a business of “one.” However, it’s a good practice to always offer your financial advice in addition to tax help. You can help your clients improve top-line revenue and bottom-line profit, and consequently, increase your value as their trusted advisor. Here are some tips for consideration:
Manage their budget
Self-employed workers must remember to track all expenses related to their work to comply with tax rules. Expenses for on-demand work could include:
- Utilities, internet and cable
- Car or transportation costs
- Supplies related to their business, including tools, fuel and insurance
- Additional homeowner’s insurance, if they run their business out of their home
QuickBooks® Self-Employed can help track expenses so that you and the client are ready at tax time. They can enter their expenses manually, or take a photo of their receipts, which QuickBooks Self-Employed will enter and categorize. If your clients’ on-demand work involves driving, they can also use the built-in mileage tracker to keep track of tax-deductible mileage. Remember, it’s important to keep their business expenses separate from their personal expenses for Uncle Sam.
A good rule of thumb is to encourage clients to pay for necessities before indulging in purchases that don’t directly benefit their business. They can deposit income into savings, investment and emergency funds first. It’s in the clients’ best interest to overestimate how much they need to save than to end up scrambling to pay the credit card bill on time.
Improve cash flow
The top reason small businesses fail is obvious, but all too common: they run out of money. Steady cash flow is key, which means your clients can pay bills on time, invest, put money into savings, and reward their hard work with purchases or vacations. Invoicing is a top requested feature from QuickBooks Self-Employed; research shows that freelancers are owed an average of $10,000 in unpaid invoices and spend 36 hours tracking down each missing payment. Now, QuickBooks Self-Employed users will be able to take advantage of functionality that has already helped QuickBooks Online users get paid 15 days faster.
Some types of on-demand work require workers to submit invoices weekly or monthly in order to get paid. As a result, they will need to create, submit and track invoices so that they know how much money is coming into their account, and whether they will have enough money to cover their expenses. Maintaining a positive cash flow means that they will have enough money to cover their expenses and any purchases that may need to be made.
Self-employed clients can increase their likelihood of getting a prompt payment by invoicing at the same time they turn in an assignment. You can advise your clients to even stipulate in their contract that they need to be paid a portion of the fee upfront before even starting to work. Regular communication with their customer or client throughout a project also helps to increase the respect of the working relationship and keeps them at top of mind, from project creation to payment. Some self-employed accounting professionals even offer payment discounts to those who pay within a few days of receiving the invoice.
Diversify the customer/client base
One way to get money more frequently is to diversify. This is wise, too, because it protects a business, should one customer stop doing business with your client. Relying on one or two significant customers means they’ll have to start from scratch, should a large portion of the income disappear. Having many customers means more paychecks spread throughout a month, so they’re always generating new income. And, as your clients increase their customer roster, they’ll be able to get a better grasp on what a typical payment schedule will be like, too.
Pay estimated taxes
Everyone must report their income to the IRS each year, whether they are a full-time employee working in a company or an on-demand worker. You know that full-time employees typically receive a W-2 from their employers and use it to report their income when they file taxes. Alternatively, on-demand workers usually receive a 1099 from each customer, client or service provider (Uber) they worked for during that calendar year. When they worked for a company full-time, the company is responsible for withholding taxes from their paycheck and delivering those tax payments to the IRS. However, on-demand workers are responsible for calculating and sending the IRS their tax payments. The IRS requires on-demand workers to send estimated tax payments every quarter, and then to file taxes by April 15 (April 18 for the tax year 2016).
One way to help your clients calculate their quarterly estimated tax payments is to use last year’s tax return information. For example, if they expect to make roughly the same amount of money this year that they made last year, you could take last year’s total tax bill and divide it by four to get to a quarterly tax estimate. You could also use IRS Form 1040-ES to help guide them. QuickBooks Self-Employed is another easy option because it tracks expenses, income and other finances for on-demand work, and can calculate estimated tax payments.
With a changing economy, there are many self-employed folks entering the business world every day, creating new opportunities for you to grow your practice. Tax professionals and accountants are in a unique position to provide vital financial and tax guidance to these types of business owners.
Editor’s note: This article was originally published on the Intuit® ProConnect™ Tax Pro Center.