The thought of freelancing and gig work excites everyone. Because it provides an additional source of income and valuable support. For many, freelancing opportunities serve as a lifeline in navigating uncertain economic landscapes. People work incredibly hard to earn every penny, but many end up losing money by not paying attention to associated tax consequences.
Understanding Freelancing & Gig Work Economy:
Freelancing and gig work involves offering your skills and services to various clients on a project-by-project basis. Freelancers are self-employed and have the flexibility to choose their projects, clients, and work hours. Popular freelance careers include writing, graphic design, web development, and digital marketing. Gig workers can range from ride-share drivers and delivery couriers to freelance consultants and tech experts.
The Evolution of Freelancing & Gig Economy
The gig economy and freelancing is experiencing significant growth, driven by a combination of technological advancements, a young and educated workforce. These opportunities are not only creating millions of jobs but also helping to reduce unemployment rates significantly.
- As of 2020, India had over 15 million freelancers, making it the second-largest market for freelancing after the United States.
- The Indian freelance market is expected to grow at a compound annual growth rate (CAGR) of 17% over the next five years.
Freelancers and gig workers generate economic output through their work on various platforms and projects, and directly contribute to the GDP. However, a recent survey highlighted that nearly half of independent workers in the gig economy are not setting aside money for taxes, with 49% failing to pay their quarterly estimated tax payments. This issue is crucial and demands immediate attention to ensure fair tax compliance among gig workers and freelancers, thereby sustaining economic integrity and equitable contribution to national finances.
Why Freelancers and Gig Workers Struggle with Tax Compliance?
Freelancing across different sectors leads to complexities in identifying and reporting income. The varied and irregular income in freelancing can create confusion during tax season. This issue is exacerbated by the lack of financial and tax literacy among many gig workers, who may not be accustomed to handle their tax obligations independently. All this result into unintentional tax evasion.
When gig workers fail to pay their taxes, it leads to significant revenue loss for the country and widens the tax gap. When gig workers and freelancers do not pay their fair share of taxes, the burden falls disproportionately on traditional employees and other taxpayers. This can lead to perceptions of unfairness and reduce trust in the tax system.
What is the cost of tax non-compliance for Gig Workers and Freelancers?
1. Interest on Late Payments: The Income Tax Department imposes interest under sections 234A, 234B, and 234C of Income Tax Act, 1961 for late filing of returns, late payment of taxes, and shortfall in advance tax payments. This interest can accumulate rapidly, adding a significant financial burden to the taxpayer.
2. Penalties for Non-Filing or Late Filing: Freelancers who fail to submit their income tax returns by the deadline may incur penalties under section 271F of Income Tax Act, 1961. Furthermore, late filers can face fines of up to ₹10,000 under section 234F of Income Tax Act, 1961, depending on the duration of the delay.
3. Fines for Underreporting Income: Under section 270A of Income Tax Act, 1961, freelancers may face penalties for underreporting or misreporting income, typically amounting to 50% of the tax due on the underreported income. In cases of deliberate misreporting, the penalty can escalate to as much as 200% of the tax payable.
4. Scrutiny: Non-compliance heightens the likelihood of triggering a tax audit, where the Income Tax Department scrutinizes a freelancer’s financial records. Any discrepancies may lead to further penalties.
5. Legal Action: Individuals may face legal action, including prosecution under sections 276C and 277 of Income Tax Act, 1961. This can result in imprisonment ranging from three months to seven years, in addition to substantial fines.
Tax non-compliance not only leads to financial penalties but also jeopardizes the hard-earned money of freelancers. Therefore, it’s crucial to understand the associated legal consequences to avoid such financial setbacks.
How to mitigate Tax Non- Compliance?
1. Maintain Records: Keep precise records of all income earned from multiple sources to avoid under reporting of income.
2. Keep Up with Technology and Software Updates: Regularly update accounting software, tax preparation software, and digital tools used for financial management. New features and updates can improve efficiency and accuracy in tax reporting.
3. Stay Aware of Digital Payment Reporting Requirements: Be aware of reporting requirements for digital payments received through platforms like PayPal, Venmo, or Cash App. Understand thresholds for reporting and comply with guidelines to avoid penalties.
4. Seek Professional Advice: Consulting with a tax professional or accountant specializing in freelance and gig economy taxes ensures you to receive personalized guidance suited to your unique circumstances. They can help to optimize deductions, navigate complex tax laws, and ensure compliance with regulations, giving you peace of mind regarding your financial obligations.
GST Compliances
1. GST Registration for Freelancers and Gig Workers: Freelancers and gig workers must register for GST if their annual turnover exceeds ₹20 lakhs (₹10 lakhs for special category states). Applicable GST rate depends upon the source of income. Depending on turnover, file monthly/ quarterly GST return and comply with other requirements related to GST.
2. Applicable GST Rates: Freelance services generally attract an 18% GST rate, which applies to a range of services including consulting, IT services, and creative work. For goods, it differs according to categories of goods. These rates can range from 5% for essential items (e.g., educational items, fruits, vegetables) to 28% for luxury goods (e.g., luxury cars, advanced games), reflecting the varied nature of products in the market. It is important for sellers to classify their goods correctly to apply the appropriate GST rate.
3. ITC: Registered freelancers and gig workers can claim Input Tax Credit (ITC) on the GST paid for business-related purchases. To claim Input Tax Credit (ITC), maintaining accurate records is essential. Ensure you have valid tax invoices and receipts for all relevant purchases. Proper documentation not only streamlines the ITC claim process but also protects against potential audits and compliance issues.
4. RCM: Reverse Charge Mechanism (RCM) for freelancers and gig workers applies where the liability to pay GST shifts from the service provider (supplier) to the service recipient (buyer). Provided RCM is not applicable where services are received by a registered person from an unregistered supplier and aggregate value of such services does not exceed ₹5,000 in a day.
RCM is applicable in following scenarios:
1. Services from Unregistered Suppliers: The freelancer or gig worker, acting as the service recipient, must calculate and pay the GST directly to the government on such services, where such services are received from unregistered supplier.
2. Legal & Accounting Services: Certain professional services, like legal and accounting services provided by individual advocates or firms of advocates, also require freelancers and gig workers to adhere to the Reverse Charge Mechanism (RCM) under GST regulations when they receive these services.
5. Place of Supply: Determining the place of supply is a difficult aspect for freelancers and gig workers, however, it is crucial as it determines the applicability of GST:
1. B2B Transactions: Place of supply under B2B transaction is usually the location of the recipient.
2. B2C Transactions: Place of supply depends on whether the services are provided within India or outside. Different rules apply based on whether the recipient is located in India or abroad.
3. Cross-border Services: Place of supply rules vary based on whether the recipient is a business or a consumer, and whether the services are classified as intermediary services or not.
6. Export & Import:
1. Export: Services exported by freelancers and gig workers are considered zero-rated under GST. This means GST is not charged on the export of services, but freelancers can claim Input Tax Credit (ITC) on inputs and input services used to provide these services.
2. Import: When freelancers and gig workers import services from overseas suppliers, they are liable to pay GST under Reverse Charge Mechanism (RCM) . Therefore, they are required to obtain registration under Section 24 of the Central Goods and Services Tax (CGST) Act, 2017.
Income Tax Compliances
1. Filing Income Tax Returns (ITR):
1. Form ITR-3: Required to be filed by freelancers and gig workers who have income from business or profession.
2.Form ITR-4: Required to be filed by freelancers opting for presumptive taxation under Section 44ADA of the Income Tax Act, 1961, applicable only if turnover is up to ₹2 crores.
2. Advance Tax: Freelancers and gig workers in India are typically required to pay advance tax under the provisions of Section 208 of the Income Tax Act, 1961. Advance tax is applicable when the tax liability of an individual (including freelancers and gig workers) exceeds Rs. 10,000 in a financial year after considering tax deducted at source (TDS) and any relief available under Section 90 or Section 91.
3. Understand Deductions: Explore eligible deductions and credits that can lower taxable income, such as expenses related to business travel, professional development, software subscriptions, and any other costs directly related to freelance or gig work. Keeping thorough records of these expenses can maximize tax savings while staying compliant with regulations.
4. Tax Deduction at Source (TDS): As per provisions of Income Tax Act,1961, Freelancers and gig workers in India are subject to TDS (Tax Deducted at Source):
1. TDS on Professional or Technical Services: Freelancers and gig workers are subject to TDS under Section 194J in respect of Payments for professional or technical services rendered by them.
2. Form 15G/15H: Where the total income of the freelancer/gig worker is below the taxable limit, Form 15G (for individuals) or Form 15H (for senior citizens) shall be submitted to the deductor in order to avoid TDS deduction.
3. Form 16A: Form 16A is issued by the deductor (payer) to the deductee (freelancer/gig worker) quarterly in respect of TDS deducted under Section 194J or other sections (not salary).
4. Form 26AS: This is a consolidated statement issued by the Income Tax Department that shows all taxes deducted on behalf of a taxpayer (including TDS). Freelancers and gig workers should regularly check Form 26AS to verify TDS entries.
5. Tax Planning: In order to minimize tax liability, freelancers should engage in tax planning to avail deductions under various sections of the Income Tax Act, such as Section 80C, 80D, etc.
Conclusion:
“Don’t Let Ignorance Waste Your Hard-Earned Money”
As a freelancer or gig worker, you can steer clear of turning your side hustle into a tax puzzle by effectively navigating taxes. Legal consequences vary from sector to sector, therefore, by tracking the source of income, understanding the intricacies of tax laws, maintaining meticulous records, and staying proactive with quarterly payments can help in ensuring financial stability and avoiding penalties. Leveraging technology, seeking professional advice, and staying informed about deductions and credits are essential tools in this journey. By adopting these strategies and staying committed to ethical financial practices, freelancers and gig workers can turn tax challenges into opportunities for growth and long-term success in their independent careers.
Author Bio
Really helped me a lot to save my taxes. thanks a lot
Thanks, very helpful.
Very helpful.