Looking forward to an annual tax refund is a tradition for most taxpayers, but to self-employed workers a tax refund can pave over possible cracks in an income stream. For gig workers whose month to month income often varies, a tax refund can be a welcome infusion of cash during a month when income is light. Conversely, during a good month it could feel like a bonus, free money to spend as wanted.
Many Americans who get a refund use it to pay down debt. Giggers may spend their refund differently than other groups of workers — on living expenses, for example, or on big purchases unaffordable during the rest of the year, like car repairs.
If the whole refund check goes for bills or one big purchase, is there another way to budget that check? Get more out of the refund? Manage the refund the better?
Certified Financial Planner Eric Roberge, founder of Beyond Your Hammock and co-host of the Beyond Finances podcast discusses how contract workers can manage — and maximize — annual tax refunds. Maybe there’s no “right” way to manage a refund, but options exist for gig workers who might feel backed into a corner when it comes to handling refunds.
First things first: is there anything wrong with a tax refund splurge?
“I don’t like framing things in terms of ‘wrong’ or ‘right.’ When it comes to your finances, it’s more about what works and what doesn’t. Are you on track to meet your goals, have you paid off high-interest rate debt, and do you have control of your cash flow? Then maybe using a tax refund to ‘splurge’ works. But if you already struggle to control expenses, tend to overspend, and have urgent financial needs like building up an emergency fund or paying off debt, then it probably doesn’t work to blow the refund on stuff that would be considered a splurge.”
How can gig workers get the most out of refunds?
“Consider what your needs are. Do you have an emergency fund? If not, your refund could help you start building a cash reserve for months when income is lower than expected. Do you have credit card debt? That’s probably costing you upwards of 15 percent in interest, so that needs to go ASAP. Have you started investing for your future? If not, the refund could help you get started by using it to open and fund something like a SEP IRA.”
For workers with a tight budget or expecting a small refund, it might seem difficult to pay off debt or save. Is there any way to stretch a small refund?
“If you can’t save or invest the entire amount, at least put away a portion of it. Commit to saving 20 to 50 percent of your refund if you need some of it to address other needs.”
How should workers plan for a bigger refund next year?
Refunds accrue when the amount withheld or set aside for taxes is larger than the actual tax bill. Roberge says, “Work with a CPA to insure you’re making the most strategic tax moves possible, and are paying the correct amount in estimated taxes throughout the year. Hiring a professional is well worth the cost when you’re self-employed or earning 1099 income. The fee you pay a CPA is going to be MUCH less than the cost of making mistakes or missing things when you file your taxes.”