Gig workers need to prepare for a tax surprise

Many people new to the gig economy get a rude surprise the next time they file their income taxes. Indeed, income from conducting Uber, Lyft, or GrubHub, or contracted services such as professional writing or graphic arts, online sales through Amazon or other marketplaces, or even services dog walking and house sitting are taxable. (Other examples: jobs based on apps like Instacart and DoorDash, as well as handyman, lawn care, independent contractors.)

While nearly all income from a “side job” is taxable, just like regular employment, one big difference is that a traditional employer is required to proactively withhold the amount of tax they are deemed that a taxpayer will likely owe at the end of the year. With a job in the gig economy, these taxes are rarely withheld, which means that taxpayers, often regular workers with limited incomes, are responsible for withholding some of this income to pay their taxes at the end of the year. year.

  • Be careful: Hire a CPA or Enrolled Agent (EA) to do your taxes.

How much tax will you owe on your secondary income?

This depends on your other income and source deductions, as well as any tax credits and deductions you may be entitled to. While there’s no easy answer, workers with incomes below $50,000 should expect to owe 20-30% of their secondary income in taxes, which will be due by April 15. next year (sometimes as late as April 18 due to weekends or holidays). You can file an extension, but that only extends the time you have to file all of your returns; the money you owe is due on the original IRS deadline each year. It’s important to keep receipts for expenses you have to pay when providing your service/business (car maintenance, miles, supplies, etc.) because these business expenses reduce your net income, which reduces the taxes you pay. will have to.

Estimated penalties and taxes

In many cases, even that might not be enough. If a taxpayer ends up owing more than $1,000 when filing the tax return, the IRS considers this to be intentionally under withholding and may add a penalty. To avoid this, taxpayers who earn income that does not have taxes withheld must pay the IRS an estimate of what their taxes will be, in quarterly installments, based on the previous year’s income (a few exceptions).

Self-employment taxes

And don’t forget Social Security and Medicare. Traditional jobs also withhold taxes for these two items from paychecks. Part of this amount comes from the worker’s salary and part is a matching amount paid by the employer. Gig workers (self-employed and contractors) must pay not only the employee’s share of social security and health insurance contributions, but also the employer’s share. This self-employment tax is 15.3% of your net gig income (12.4% for Social Security and 2.9% for Medicare).

Will the IRS know if you don’t report your income?

That’s the question everyone wants to ask, but tax professionals don’t want to answer it for ethical or liability reasons. I can answer that, to some extent, since I am not a tax professional, but have worked with and with tax professionals for over 20 years.

The short answer is if you work or contract with a company that pays taxes, then YES, the IRS will probably find out pretty quickly if you don’t report your ancillary income. This is because the business paying you (whether it’s an app-based business like food delivery or a traditional business where you provide contract work) is going to deduct the amount they paid you as an expense for their business. To do this, they will likely issue you a Form 1099-NEC or another Form 1099 – and a copy will be sent to the IRS. Even if you do not receive such a form at the end of the year, it is safe to assume that they have reported or will report that they paid you to the IRS. These companies are also legally required to report payments of at least $600 per year to anyone for contract work.

For workers who have earned income in less organized activities, such as those who have worked directly with clients where there is no paper trail (no business app or third-party business partner), or those who have been paid cash for their work, it is more difficult for the IRS to know about the income transaction. This does not mean that there is no obligation to declare the income. Intentionally failing to report taxable income is illegal. If the IRS has a reason to look at your taxes in future years, or the taxes of those who paid you, the agency could uncover your omissions. In this case, taxpayers may possibly face a criminal conviction for failure to report income, and the taxpayer would most likely have to repay taxes, penalties, and interest on any failure. Penalties for negligence may also be imposed. It is also possible that government benefits may be garnished until payment is made.

What the IRS says:

“Generally, income from the gig economy is taxable and must be reported to the IRS. The gig economy is an activity where people earn income by providing labor, services, or goods on demand Often this is through a digital platform like an app or website Taxpayers must report income from the on-demand economy on a tax return, even if the income is:

    • Part-time, temporary or extra work,
    • Not reported on an information reporting form – such as a Form 1099-K, 1099-MISC, W-2, or other income statement or
    • Paid in any form, including cash, goods, goods or virtual currency.”

Visit the IRS Gig Economy Tax Center: https://www.irs.gov/businesses/gig-economy-tax-center

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