Completing tax forms can be an onerous task, however done correctly it can also be rewarding. Xero have announced the launch of Xero TaxTouch, aimed at helping gig workers and freelancers complete their Schedule C tax forms (Form 1040) to maximise their legitimate tax deductions.
Xero recently conducted a poll that covered 300 gig workers. The gig economy is a recent phenomenon in the US that sees people generate income from adhoc “gigs” similar to those by musicians. Examples include AirBnB, Uber, Lyft and other brief business transactions from which people can earn supplemental income, in some cases a living wage.
The income they generate is not negligible with Xero claiming that 4%, one assumes these are full-time gig workers, earning more than $50,000 in a given year. A further 14% earn between $10,000 and $50,000 with 34% earning in the region of $2000-$10,000. The question is if some of that income goes in tax returns how much more could be claimed?
Uber drivers, for example, may be able to claim back some fuel costs as a business expense significantly reducing their tax bill. While the Xero poll was small it did bring out some interesting insights into gig worker behaviours. 96% of those polled had another source of income, with 28% working full time, 39% part time and another 22% additionally working in the more traditional freelance or contract work sector.
Gig workers often obtain work through the digital marketplace and the Xero poll revealed some interesting facts about the sources they use to find work. Uber was most popular source of income with 34% finding work from it. Lyft, Freelancer.com and TaskRabbit each providing about 13-14% of gigs. Gig workers also use multiple sources for income and while 44% only use a single source, 42% said that they use either two or three with the remainder using four or more.
The survey also revealed that many fail to minimise their tax. More than one quarter of those polled don’t track or deduct business expenses, two thirds failed to file quarterly tax estimates and three quarters don’t use a professional to complete their returns, an expenses one suspects that many feel is not cost effective.
The one question that Xero failed to find to the answer to unsurprisingly, is how many people are filling in their tax forms incorrectly. This creates a potential risk in future years as the IRS looks to claim back its lost revenue. As tax systems become more effective over time there will no doubt be a time where the IRS looks to challenge these new gig workers and validate their tax returns no matter how small this additional income is.
How does Xero TaxTouch help
The question Xero posed itself was how much better could these people be if Xero made it easier to claim deductions when filling out their forms. It would have been interesting to see what elements from the tax form people were not claiming for. One suspects that travel, meals, home office space are some of those that freelancers seldom claim for.
Xero TaxTouch makes it easier for freelancers to track these expenses and maximise their business related tax deductions. A gig worker that uses a tax professional will use the output by Xero TaxTouch to help streamline the process and provide the advisor with the relevant information, saving time and effort on the gig workers behalf.
There are 54 million freelancers in the US and ,according to the Xero survey, 75% who don’t use professional advice might be missing out on some tax deductions with 27% definitely missing out as they never enter any. The Xero TaxTouch app allows the automatic download of bank and credit card transaction details from most major US banks and credit cards. It then allows the user to identify each expense as a business or personal transaction.
This is accomplished swiftly by the user simply swiping across the expense either to the left or right, depending upon whether it is a personal or business cost. One hopes that there is also some guidance on what expenses can be tax deductible and what can’t. For example some meal costs are tax deductible under certain circumstances and the user would need to be aware of when they are and when they are not. There is no indication that Xero will help users make this decision, though one could argue it should be left to a professional to advise.
When the tax returns are due the user is able to produce a simple report that categorises all the expenses into the relevant deductions categories. This is helpful to professionals as David Emmerman, Partner, Emmerman, Boyle & Associates, LLC, New York accounting firm comments: “We are seeing more and more of our clients working in the on-demand economy. They’re giving up full-time employment and working on a per gig basis because they enjoy the flexibility and freedom it affords.
“Tracking expenses and income is key to their success and we have been impressed by the simplicity and ease-of-use of Xero TaxTouch.”
The new app is available from March 8th and is priced at $5.99/month or $29.99 for the first year. It can be downloaded from the iOS appstore only. It will be interesting to see when the app is available on android devices too.
It is sometimes surprising how few people take advantage of the tax deductions that are on Schedule C. While it is important to understand what can be claimed the Xero TaxTouch will help and speed up the tax returns for workers that find that they take considerable time in doing this.
It no longer needs to be a matter of poring over credit card statements at the end of every month, or worse still every year but can be accomplished quickly once the bill it received. The added advantage of flicking through one’s credit card bill monthly is that one gets a view of all transactions that the card has been used for and provides another check for unauthorised usage.
Xero’s U.S. President, Russell Fujioka commented: “The way people work is changing, as is the way individuals generate income, track their business earnings and manage their taxes. This inevitably creates new opportunities for the accounting profession. Xero TaxTouch has been thoughtfully designed to simply meet the needs of the freelance workforce and to make life easier for tax professionals.”