21 Dec 2020 Tax Tips for the Gig Economy
What has the IRS cooked up for us this year? I was reviewing some of the tax changes for 2020, and it seems like the big changes came last year as part of the Trump administration’s Tax Cuts and Jobs Act. What did get my attention were some cautionary items directly related to the growing number of people who are employed as contractors—the gig workers.
Back in the days when we all had regular jobs, it was easy. We got one W-2 form in January and used it to file our taxes. Now contractors can easily have ten or more W-2s to include in their April filings.
Outsourcing has become a standard part of the way we do business
Despite the pending new gig law legislation, companies of all sizes are routinely filling in skill gaps and boosting efficiency by hiring contractors or companies with specialized services. As the gig economy grows, we’re seeing a flood of contractors in the workforce. Still more people are not so much contractors as working multiple low-paying jobs to make ends meet.
All of this translates to more taxpayers with multiple streams of taxable income that their employers may or may not be reporting. The burden is on the IRS to track all of these incoming and outgoing payments–which could go undetected. Then again, by not reporting these payments, taxpayers could receive a penalty and set themselves up to be audited.
If you’re audited, you’re more likely to be audited again
According to the IRS, each tax return is individually evaluated for an audit. If a prior audit was resolved in your favor, every effort is made not to select your return the next year for the same issues. However, let’s say you’re audited because you didn’t include all of your earnings and the audit was not resolved in your favor. If you file another return and fail to report all of your earnings again, you are setting yourself up for another audit. No one wants to become a consistent audit target by the IRS.
Paying estimated quarterly taxes on time
New gig workers may not know that taxpayers are required to pay quarterly estimated taxes for the current tax year. They may not know how and when to make their payments. A failure to pay quarterly estimated taxes does a couple of things. It can:
- Result in a massive tax bill in April.
- Trigger late fees and interest on top of the base tax figure. For high earners, such as those in the tech sector, this could amount to thousands of dollars in additional taxes.
Quarterly tax payments: Estimates of what you’ll earn over the course of a year
- In order to accurately estimate your tax burden, contractors need to keep meticulous records and run calculations to generate a ballpark estimate.
- You may slightly underpay, but it’s better to overpay to avoid a big surprise in April.
- A rule of thumb: Set aside 22-24% of every client payment you receive into a savings account that’s reserved for making payments throughout the year.
These quarterly tax payments need to be paid on time, yet an estimated 20% of people file their taxes late. The result is penalties, fees and other inconveniences.
Errors on Tax Forms
Errors lead to delays in processing, but there’s a bigger issue–they can also flag audits. Typical errors include incorrect Social Security numbers, inaccurate bank account information, a lack of proper signatures and missing information. One of the biggest errors that taxpayers make is underestimating the amount of taxes they owe.
These cautionary reminders may seem like common sense
We all know enough to sign our taxes before filing and to use our correct Social Security number. But I know several people who have just begun working as contractors, and they do not know that they must file quarterly taxes. I’m guilty of being a little late on my own quarterly filing. The bottom line is that you really don’t want to do anything that will raise a red flag with the IRS. An audit is time consuming and expensive. If dealing with your taxes is something that is difficult for you, outsource it. It’s worth it.
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