It’s a pretty bold claim to say that this is the BEST cheat sheet for independent contractors. I can totally see the title of this post as being a bit too brag-a-docious. But in an effort to serve up content that would’ve helped me when I first started my side gig, I felt compelled to put together a list of the top five tips that I wish I knew before I dove head first into becoming an independent contractor. Plus, if you’re anything like me, you also love a good cheat sheet. Sparknotes, anyone?
You already know this, but working a side gig has a ton of benefits. The flexibility, the ability to earn on-demand income, and of course the fact that you’re the boss. Hello there, boss!
But along with all of these attractive benefits, many side gig entrepreneurs forget that they’re independent contractors. And worst of all, this mysterious tax classification can leave anyone completely confused and frustrated.
And just in case you’re wondering, if you’re currently a rideshare driver or any kind of side gig entrepreneur, you are an independent contractor. No exceptions.
Unless of course, you live in California and the AB 5 Bill passes. If that happens, we’ll have lots to talk about!
I’ve been a side gig entrepreneur many times in my career, and looking back, the biggest regret I have is that I wish I wasn’t so dang CLUELESS when it came to managing independent contractor best practices. I literally had zero clues when it came to this topic. Ziltch.
If only I had done a little pre-planning and *gasp* some simple math, I probably wouldn’t have been so shocked when tax season rolled around.
In hindsight, I realize that I learned a very expensive lesson. Yet, in a weird way, I’m glad it happened. Now, I can help you, (you beautiful reader of this post) set up your side gig business for success. And most importantly, avoid the wrath of the IRS.
So, today, I’m sharing my BEST cheat sheet for independent contractors. These five tips are ALL. OF. THE. THINGS. that I wish someone would have told me before I got my Form 1099 in the mail and basically fainted.
1.) You should be paying quarterly taxes.
Ordinarily, nothing says instant gratification like a pile of cash sitting in your rideshare app. There’s no greater feeling than looking at your earnings dashboard after a long night behind the wheel, am I right? But don’t be fooled. You’re an independent contractor and you’re not pocketing as much money as you think you are. Here’s why.
The cash sitting in your app has not been taxed yet. A portion of it belongs to the IRS. The sooner you understand this, the better off you’ll be.
I hate to break it to you, but Uber and Lyft (or any other app-based gig company) are not withholding taxes from your pay. So, the best practice here is to BUDGET and SAVE a portion of your total earnings every month to pay for your estimated quarterly taxes, which are due every 3 months.
Ideally, you’re making quarterly tax payments to the IRS like clockwork. Then, the IRS sets aside this money to go towards the total tax amount you’ll owe for the year.
In other words, you’re paying your taxes as you go.
This method of “paying as you go” is a fail safe way to avoid an unexpected high tax bill at the end of the year. For extra help on submitting quarterly payments: Go here for instructions on how to make your quarterly payments online to the IRS.
2.) Set up a savings account. Now.
One of the most common questions that independent contractors ask is how much money should I set aside for taxes? This topic is debatable but it’s often recommended that you set aside 25% – 30% of your income to cover your self-employment tax and income tax.
Pro tip: Calculate how much money you earned last month, then set aside 25% to 30% of it before you begin paying your next month’s bills.
Yep, 30% sounds like A LOT. But before you panic, know that you can subtract your business expenses from your overall side gig income to arrive at your leftover, taxable income. So, there’s a bit of good news there.
The easiest way to stay disciplined with your savings is to automatically transfer money to a savings account that you’ve designated for taxes. Here’s how:
- Link that savings account to the checking account that you use to deposit your side gig income.
- Next, automatically transfer a portion of your cash to the savings account when you make a deposit.
- Finally, pat yourself on the back for a job well done. Suzy Orman’s got nothin’ on you!
3.) Keep track of ALL of your expenses.
Keeping track of your expenses, when you’re an independent contractor, should be so ingrained in your side gig routine that it becomes part of your religion. And if you’re not a religious person, consider it one of your highest priorities for managing your business.
You may be thinking, why is tracking expenses so important? I’ve got two words for you. Deductions, baby. Deductions will help lower your taxable income which will result in a lower tax bill at the end of the year.
If you’re not tracking your independent contractor business expenses already, here’s where you should start.
Record all of your expenses such as fuel, maintenance for your vehicle, your cell phone bill, car washes, tolls, and of course MILEAGE. Basically, anything that you purchase which is a necessary tool for you to conduct business can be counted as a business expense (or deduction).
It’s 2019. Use some apps to get your expenses in order.
Above all else, make sure you’re using technology here to help you out with your mileage and expense tracking. There’s tons of apps out there like Stride Tax Mileage Tracker, MileIQ, Hurdlr, or TripLog 2.0 that automatically (and accurately) logs and calculates your mileage for you and sends you a nice weekly or monthly report.
In short, I would hate for you to miss out on the thousands of dollars in legit deductions here, simply because you didn’t compliantly track your expenses. It doesn’t take much to get into a “tracking habit” so start tracking your expenses today!
4.) Build a cash cushion.
My next tip for independent contractors is to build a cash cushion. When I think about a “cash cushion,” a fluffy green pillow filled with Benjamin’s immediately comes to mind. MMMmm sounds comfy!
But, regardless of whether or not you can relate to that gorgeous visual, I cannot stress enough the importance of a building a cash cushion especially when you’re an independent contractor.
Just so we’re all speaking the same language, your cash cushion is not your “emergency” fund. I’m not talking about the stash you have just in case life literally flips off the rails. (I hope this NEVER happens to you).
Instead, your cash cushion should be a nest egg of sorts, perhaps in a savings account or maybe even an investment account, that can range in value anywhere from a few hundred bucks to a few thousand.
Now, you may be thinking, why should I save yet ANOTHER stash of money? I’m already saving for employment tax AND income tax!
Valid point and I hear ya loud and clear. I’ve learned the hard way (from first hand experience) that your cash cushion will come to the rescue if you’ve either underestimated the amount of tax you’ll owe at the end of the year or if you have outstanding tax penalties.
Better to have a soft, squishy cash cushion to land on instead of a giant tax bill with no way to pay it. And just so you know, giant tax bills are not soft and squishy.
By the way, it’s not lost on me that there will be times when it’s not possible for you to save the 25% – 30% per month or even put ONE DOLLAR towards your cash cushion. This is real life and stuff happens unexpectedly. (Baby needs a new pair of shoes!)
Therefore, it takes a little time, practice and discipline. So, whatever level you’re currently playing on, be real with it. Only you truly know your spending habits and your ability to *ahem* save money.
5.) If you’re unsure, hire a tax pro.
A trusted tax professional can be an absolute life saver, especially when you’re navigating the murky waters of independent contractor-hood. If you have the room in your budget to do so, there is truly nothing better than having a tax pro in your corner to help you prepare for tax season.
This should probably go without saying, but make sure you do your homework on your tax pro before you hire them.
Here are some questions to consider when evaluating your tax preparer:
- Do they have good referrals or reviews?
- What other records will they need to prepare your taxes (besides Form 1099)?
- How are their fees structured?
- How can you get a hold of them if you have a question or problem when tax season is over?
- Do they prefer dogs or cats? (Actually, scratch this one. Just checking to see if you’re still paying attention.)
In short, if you’re doing it right, choosing the right tax preparer should take some time and research. But rest assured, it will be time well spent and totally worth it.
And there you have it. Cheat sheet complete.
Wow! You made it to the end of this epic post. I’m super impressed with your attention span right now.
I’d love to hear your thoughts on this topic! What do you find to be the most challenging about being an independent contractor? Anything you wish you knew before you started this journey?
If you’ve got a sec, post a comment below. I’m all ears.