Ease Your Worry: 5 Important Tips for Gig Workers to Reduce IRS Audit Risk
The transition from traditional employment to self-employment is becoming more common, with many workers now entering the gig economy. The IRS has taken notice of this shift and is paying closer attention to gig workers, freelancers, and small business owners.
Ordinary individual taxpayers have less than a 1 percent chance of being audited by the IRS. However, the audit rate is on the rise for small business owners, and that includes those in the gig economy.
This growing audit rate is a cause for concern, but there are steps you can take to reduce your risk of an audit.
Five Expert Tips to Minimize Your Audit Risk
1. Track Your Earnings Using Apps or Platforms
One major concern for IRS auditors is when people don’t report their income correctly. It’s important for all gig workers, freelancers, and self-employed individuals to keep careful track of their earnings and report them properly.
Many gig economy platforms make it easy to track your earnings. If you work for an app-based service, you can often find your total earnings on the platform without the need for calculators or spreadsheets. If you’re not using these platforms, tools such as Quickbooks can help you keep accurate records. This ensures that when the IRS requests more information, you’re prepared and can reduce your audit risk.
2. Request 1099 Forms from Small Clients
Gig workers often have multiple clients, which can make accounting and tax reporting challenging. To simplify this process, ask each client to issue a 1099-MISC form, showing how much you earned throughout the year.
While major clients may already provide these forms, smaller clients may not be aware of their reporting responsibilities. Explain to them the importance of accurate reporting to convince them to issue the required forms. This will help reduce your risk of an IRS audit.
3. Verify Earnings with Payment Processors
Payment processors such as PayPal, Stripe, and Payoneer offer a convenient way to receive payments and keep track of your earnings. These services often provide detailed reports, which makes income documentation easier for small business owners.
If you’re unsure about what to report to the IRS, access your payment processor’s app or website to calculate your earnings. Some processors offer detailed reports, while others may require a bit of searching. Regardless, you can likely obtain the necessary information this way.
4. Keep Deductions within Legal Limits
As a gig worker, you’re essentially a small business owner entitled to various tax deductions. You can deduct expenses such as your car and home office utilities to lower your tax bill. However, it’s important to stay within reasonable and legal limits when claiming deductions.
Excessive deductions can raise red flags with IRS auditors, potentially putting you at the top of their audit list. Ensure that your deductions are legitimate and proportionate to your business activities.
5. Make Timely Estimated Payments
If you frequently take on gigs, you may need to make quarterly estimated tax payments to the IRS. Missing these deadlines can lead to penalties and potentially trigger an IRS audit. To stay organized, mark your calendar and set aside enough money to meet the IRS payment deadline. Quarterly payments are a standard practice for the self-employed, including a growing number of gig workers.
Fighting an IRS Audit with Peace of Mind Tax Help
The gig economy is booming, offering opportunities for individuals seeking self-employment. However, as the IRS takes notice, you must protect yourself from potential audits. By following the tips above, you can lower your audit risk and focus on growing your gig business.
If you’re dealing with IRS issues or owe $10,000 or more in back taxes or are undergoing an audit, contact our tax resolution firm for a free and confidential consultation to explore your options and resolve your tax issues.