Tax Knowledge Gaps Among Gen Z Self-Employed
Most Generation Z self-employed individuals do not fully understand the nuances of tax laws when reporting income to the Internal Revenue Service, according to a recent Lili survey. This lack of awareness could result in financial losses through penalties and missed opportunities. Specifically, 90% of self-employed respondents stated they were unaware that taxes on earnings must be paid quarterly. Additionally, 56% reported unfamiliarity with deductions available to lessen their tax burden and support business finances.
Penalties for Quarterly Tax Non-Compliance
Failure to make required quarterly payments imposes a 0.5% penalty on the unpaid taxes for each month or portion of a month they remain outstanding, as specified by the IRS. For small business owners, tax season often feels burdensome due to incomplete records, uncategorized expenses, and time constraints. The IRS provides hundreds of deductions for small businesses, yet many remain underutilized.
Delayed IRS Reporting Threshold for Third-Party Transactions
The IRS announced a one-year delay for a new reporting rule mandating small businesses and side hustle workers to report income and transactions exceeding $600 via third-party settlement organizations like PayPal and Venmo. Previously, Form 1099-K applied only to 200 or more transactions totaling at least $20,000. This change would affect even occasional gig workers earning $600 or more, with penalties for non-disclosure. Casual sellers earning under $5,000 annually, often from used goods sold at a loss like textbooks or downsized personal items, face disproportionate impacts according to the Coalition for 1099-K Fairness.
Strategies to Manage Self-Employment Taxes
Self-employed individuals can minimize tax liability by filing on time to avoid penalties and interest. Essential bookkeeping tracks deductible business expenses; however, one in three Gen Z respondents relies on smartphone notes apps per the Lili survey. For businesses exceeding $80,000 annually, electing S Corporation status over a standard LLC allows payment of a reasonable salary subject to annual taxes, eliminating quarterly payments, with remaining profits distributable or retained.
Start keeping receipts from the very beginning. Write out every expense you can think of (legit expenses, not Starbucks) and enter them into a software program while attaching a receipt. If you don't have access to software, download them into a Google Drive file.
Now is the time to consider your business structure to optimize any possible self-employment tax savings throughout the entire year.
