Over the last year, the COVID-19 pandemic has forced millions of Americans out of full-time employment and into the ranks of the gig economygig economy. Fortunately, the internet has made it easier than ever to pick up a side gig quickly. Think Uber and Lyft, eBay and Etsy, DoorDash and Seamless, Patreon and Substack—even OnlyFans. Whatever your opinion of these companies and their business models, there’s no doubt they kept the lights on and food on the table for vast numbers of people in 2020. If you’re one of those people, it’s time to consider what that means for filing your taxes in 2021, and we can help.
To be specific, newly self-employed individuals face an unfamiliar accounting challenge: tracking business income and expenses and filing income taxes that include at least one Schedule C. A handful of companies already established as providers of personal tax preparation websites—Intuit TurboTax, H&R Block, TaxAct, and TaxSlayer among others—have created specialized versions for the gig economy crowd. We recently reviewed their midrange versions, which look and work similarly. We’ll detail some of the differences in their self-employed versions in this piece.
How Does Working at Uber or Lyft Affect Your Taxes?
Unsurprisingly, personal tax preparation services focus on personal tax issues. They help you record more traditional income that comes from sources like employers (W-2s), financial institutions (like interest and dividends), and government/private industry (retirement income like Social Security and pensions). They also help you track down every expense that could be tax-deductible, including mortgage interest, charitable contributions, medical expenses, and childcare costs. This is about all most people who work for someone else need to file their taxes.
Self-employed people need quite a bit more. Yes, they too have to report pretty much everything employees do, but they also have to file a Schedule C and pay the dreaded self-employment tax. Because these issues can be complex, some need extra guidance when they record their business income and expenses. The aforementioned companies provide all of that in the versions they’ve tailored to meet the needs of the self-employed. These are the most expensive editions offered by each—it costs from $47-120 to prepare and file federal returns, with an additional charge for state.
Note: All prices mentioned in this article are suggested retail prices. As of this this writing, almost every company has special promotional prices in place that will go up to the list prices as we get closer to the tax filing deadline, so it’s a good idea to file as early as you can. The IRS started accepting e-filed returns on February 12, 2021, so it’s well past time to get started, if you haven’t. Last-minute filers nearly always pay more for their tax software!
An Exceptionally Good Deal for the Self-Employed
There’s another tax website that helps you prepare and file your federal and state taxes at absolutely no charge. It includes support for the Schedule C. In fact, you can prepare and file any of the IRS’s most commonly used forms and schedules on the site. Credit Karma Tax, an offshoot of the popular credit report monitoring site, Credit Karma, has been in operation for several years now. (Square recently announced its intent to acquire Credit Karma Tax.)
What’s the catch? The site doesn’t offer nearly as much guidance as its paid competitors, and its navigation system isn’t overly helpful – two big drawbacks for a personal tax preparation solution. If you can live with those things, though, it’s worth checking out. FreeTax USA charges $12.95 for state returns, but you can prepare and file your federal return for free. The site supports all major IRS forms and schedules, so you can use it to prepare a Schedule C. And overall, it offers more guidance and tax preparation tools than Credit Karma Tax does.
How Tax Software for the Self-Employed Works
Tax preparation websites work like giant, multi-step wizards. They ask you tax-related questions and you answer them, advancing through the site until you’ve covered everything relevant to your situation. Along the way, they offer help in a variety of ways. When you’re done, they review your return for errors and help you file. You don’t have to pay until that point, so you can always try before you buy.
At some point in this virtual interview, you’ll be asked if you have income and expenses from self-employment. This is where the site will ask a lengthy series of questions whose answers will eventually appear on your Schedule C. You don’t see the actual IRS document while you’re working, since all calculations and placement of numbers and other data takes place in the background. You only see clearly worded questions or statements that you respond to by filling in blank fields, selecting from lists of options, and clicking on buttons.
Schedule Cs and Other Self-Employed Issues
It’s not just that gig economy-focused versions let you prepare and file a Schedule C that makes them good tools for the self-employed. Each has its own extras for that group of taxpayers, content built into the interview that further educates users on this element of tax preparation.
If you’re using TurboTax Self-Employed ($120 federal, $50 state), for example, you’ll find that the site may already know something about your type of gig (if it’s common enough). It will go ahead and make some assumptions based on that, saving you some work. You have only to modify and/or approve what’s there.
Much of the information you provide will be generic – applicable to most businesses. You’ll be asked to supply a business description and code, for example. Do you carry inventory? What accounting method do you use? Did you receive a Form 1099-NEC (nonemployee compensation) or 1099-MISC (miscellaneous income)? What was the total of your self-employment sales?
But specialized guidance stays with you as you continue to enter income and expenses, which comprises the bulk of your Schedule C. H&R Block Self-Employed ($109.99 federal, $36.99 state) steps in and tailors the interview based on income and deductions common to your particular profession.
Many small businesses need to record similar types of data when it comes to expenses that can be deducted, things like advertising, office supplies, and computer equipment. Self-employed individuals may have others in addition, depending on the kind of work they do. TaxAct Self-Employed ($64.95 federal, $44.95 state) offers its own Deduction Maximizer feature that provides extra assistance in areas like vehicle expenses, equipment rental, home office, and self-employed retirement plans.
You don’t have to spring for TaxSlayer Self-Employed to be able to complete and file a Schedule C. TaxSlayer Classic supports that option, as well as all other major IRS forms and schedules, for $17 ($32 state). What you do get if you pay the $47 for the self-employed edition ($32 state) is additional personal guidance: chat and priority support, as well as access to tax professionals.
Getting the Help Gig Workers Need
This extra help that these versions provide for self-employed taxpayers joins existing support systems that all tax websites offer. This is such a critical element of online tax preparation and filing – especially when you’re dealing with the financial workings of a small business. The IRS has its own red flags, tax situations that may get an extra dose of scrutiny. Many of these can be found on the Schedule C. Even if you’re not audited, you can be penalized for inaccurate income- and expense-reporting.
Keep in mind that the technical help offered on tax websites is limited to questions about the actual tax preparation process, like site operations and guidance on where to enter specific types of data. Support staff does not function like CPAs do. Representatives cannot provide actual tax advice and professional counsel.
Each tax prep site we reviewed has its own unique blend of assistance. Generally, the more you pay for an application, the better and more skillfully integrated its help is. Even these sites’ mobile versions manage to pack a lot of support into the small screens in addition to the ability to prepare and file even a complex tax return.
Here are the kinds of help you may encounter, depending on which version you’re using. You might notice that some terms and phrases contain hyperlinks that take you to simply worded, clear explanations of the current topic. There could be a question mark or a Learn More link next to a question that does the same thing. Or you might see context-sensitive Q&As or a related statement off to the side that links to more information.
Every tax preparation website has a database of educational income tax content that you can search by keyword, phrase, or IRS form or schedule number. The best applications come back with numerous hits for your queries (depending on how focused your search criterion is), with the most relevant at the top. Most of the time, these articles or brief explanations will have been rewritten to be more understandable, while other times you’ll be reading what the IRS has provided.
If you’re still stumped after consulting local resources, you may be able to connect with a CPA or EA (Enrolled Agent) or other tax experts about tax-related issues via email, chat, or phone, for an extra fee. Some companies offer on-demand video chats with CPAs or EAs. If you choose one of these, you can see the tax pro but he or she can’t see you – only your screen. TurboTax Live Self-Employed ($200 federal, $55 state), for example, connects you to a CPA or EA who can offer tax advice and guidance not only during filing season, but year-round. You prepare your own return with their assistance as needed, and then they do a final review before filing
H&R Block offers a similar service called Online Assist that you can add at any time in your tax journey. The Self-Employed version starts at $194.99 plus $36.99 per state filed. Both companies offer another option. You upload all of your tax documents to a professional and let him or her prepare your return. You review and sign it before it’s filed. This is all done online, though since H&R Block has physical offices, you can either drop your documents off or meet with a tax pro in person, too. Jackson Hewitt offers a similar range of services.
Better Documentation Means Easier Tax Filing
As you’ve doubtless discovered if you started working for yourself in 2020 and didn’t keep immaculate records, documenting everything—every mile you drove, every hour you worked, every stamp you bought for shipping, every dollar of your own you put into your gigs and side hustles—is critical.
Tax preparation websites don’t help you with the daily record keeping that you must do as a self-employed individual, though. For that, you should consider online accounting tools for freelancers, like Intuit QuickBooks Self-Employed or GoDaddy Bookkeeping. As tax time approaches in 2022, you’ll thank your 2021 self if you choose—and scrupulously use—one of these services.
