Gig economy occupations have exploded in popularity in recent years, especially following the coronavirus outbreak. Taxpayers are finding it simpler than ever before to work for themselves, because to new business options from businesses like Uber, Airbnb, and DoorDash. Workers are unlikely to consider the tax implications of the gig economy as they begin new occupations.
Gig economy jobs turn workers into small business owners
Many people are astonished to learn that, in the eyes of the IRS, they own a small business as an independent contractor. Small firms face additional tax restrictions, as well as the possibility of increased IRS audits and notices. Whether your gig economy work is your major source of income or a side business, this is true.
It’s crucial to understand that filing taxes as an independent contractor might be difficult. When it comes to filing and paying taxes, you’ll normally have extra requirements. This includes stuff like:
- Estimated quarterly tax payments
- Deposits and filings of payroll taxes
- Keeping track of payments to contractors on a year-by-year basis
- Keeping track of sales tax
- Requirements for state and local licencing
You’ll deal with the IRS and your state a lot more as a result of all these requirements. Furthermore, you are considerably more likely to be questioned by these tax authorities.
The 6 most common problems when filing taxes as a self-employed worker
1. “I didn’t know I had to pay self-employment taxes.”
This is a common blunder made by newly self-employed individuals.
When you file your return, you may be astonished to learn that you owe an additional 15.3 percent tax on top of your income taxes. This is referred to as the self-employment tax, and it includes Social Security and Medicare contributions. If you aren’t aware of it, it can result in a huge tax burden.
If you were an employee, you would be responsible for half of the cost, while your employer would be responsible for the other half. Both are your responsibilities as a self-employed person. On the plus side, you can deduct half of your self-employment tax to offset your income thanks to a unique tax deduction for independent contractors (self-employed individuals).
2. “I had no idea I had to pay for the entire year.”
Self-employed people must put in tax payments four times a year instead of having taxes automatically withdrawn (like employees do) (called estimated tax payments).
The best time to learn about projected payments is now, if you didn’t know or forgot about sending in your quarterly payments. But keep in mind that if you don’t make these payments for several months, you may end up owing a large tax bill, as well as penalties, when you file.
If you can’t afford to pay, you can petition for an extension or set up a monthly payment plan (known as an IRS instalment agreement).
3. “I continually falling behind on my tax payments.”
Self-employed folks are prone to falling behind on their projected taxes. When they do, they frequently file and are left with hefty tax liabilities that they are unable to pay.
If you have an IRS payment plan and then file, owe, and fail to pay, you may be regarded to have defaulted on your arrangement. You’ll spend more money setting up a new instalment plan, owe more fines and interest, and deal with the IRS more frequently. If you owe tax on a later return, you may be able to add it to your current payment plan, but higher penalties and interest will almost certainly apply.
There are additional implications if your tax bill exceeds $50,000. The IRS may request additional information about your financial condition in order to establish a payment plan, and the IRS may register a federal tax lien, which can make it difficult to obtain credit.
4. “I didn’t report monetary payments,” says the narrator.
The IRS may obtain copies of records that verify your income, such as Form 1099-NEC or Form 1099-K, depending on the sort of job you have. However, many small firms, particularly those in the gig economy who labour for cash, rely on the honour system to declare their earnings.
In addition, the IRS has few, if any, Forms 1099 to authenticate income from cash-intensive firms. It’s only natural that every IRS audit of a small business begins with a check to see if the company has disclosed all of its earnings.
5. “Personal expenses were ‘written off.'”
In small business audits, this is another important area where the IRS checks.
Cars, cell phones, in-home offices, and travel and dining expenditures are all common deductions for new small-business owners. However, unless you can prove that the spending were business-related, the IRS considers many of these expenses to be personal (and hence non-deductible).
The bottom line is to keep meticulous records.
6. “I didn’t file on time (or at all, for that matter).”
Because they can’t pay their taxes, many small businesses put off filing. Many businesses incur huge tax payments and penalties as a result of their procrastination. The penalty for failing to file is 5% per month (or partial month) that the return is late. If you file your return more than 60 days late (including extensions), you will be charged a penalty of 100% of the unpaid tax or $435, whichever is less. As you can see, even if you can’t pay right away, it’s best to file on time.
As previously stated, the IRS collects information about your earnings using several tax forms. In recent years, for example, the IRS has detected a large number of nonfilers with Form 1099-K, which details payments received through debit/credit cards and third-party processors like PayPal.
Many small enterprises, particularly those in the internet retail sector, are now required to reconcile their revenues to this format. IRS delinquent-filing notifications and IRS enforcement actions are issued to independent contractors who do not file taxes and get this form.
Gig economy taxes are always on. Here’s where to get help.
Taxes should be something you keep track of all year if you’re a business owner, especially an independent contractor in the gig economy.
Start by keeping solid records, paying anticipated taxes to keep your tax balance low when you file, and filing an accurate return at the end of the year.
Self-employment tax returns
H&R Block will be there for you when you’re ready to file your taxes as an independent contractor.
With H&R Block, you can file your taxes with confidence, knowing that you’ll receive the maximum refund – or your money back. We’ll assist you in determining all of your personal and company deductions.
Obtaining assistance with IRS audits and notices
After filing, small-business owners can continue to interact with the IRS. The key to minimising tax surprises for small-business owners is knowing your needs and being prepared for more IRS involvement (and maybe scrutiny).
If you’ve fallen into one of the six most common tax pitfalls, a tax professional can help you figure out what’s wrong and even deal with the IRS on your behalf. With chicastaxservice Tax Audit & Notice Services, you may learn how it works.
Read more: Why Is My Tax Refund Delayed?