Employment opportunities in the “gig economy” have grown rapidly in recent years, and this trend is expected to accelerate as a result of the various ways in which the pandemic has altered our daily lives and the methods in which we conduct business. Due to the rise of on-demand services like Uber, Airbnb, and DoorDash, more people are able to work independently and avoid paying payroll taxes. Workers certainly aren’t considering the tax implications of the gig economy as they take on additional jobs.
Discuss your situation with small business tax advisors.
Workers can become entrepreneurs through gig work.
It comes as a shock to many people to learn that the Internal Revenue Service treats them as the owner of small businesses if they are independent contractors. Additionally, the IRS may conduct additional audits of small businesses and send out more notices of impending audits. This holds true regardless of whether or not your gig economy work is your main source of revenue.
If you’re an independent contractor, you should know that tax season may be a stressful and confusing time. A greater number of filing and payment requirements are the norm. To wit:
- Paying taxes on estimate every three months
- Reporting and paying payroll taxes
- The annual recording of contractor payments
- Sale tax reporting
Licensing standards vary by state and municipality.
These regulations will increase your contact with the Internal Revenue Service and your state. Furthermore, these tax authorities are significantly more likely to ask you.
Biggest tax-filing headaches for independent contractors
My ignorance of the need to file self-employment taxes has cost me.
It’s easy for novice business owners to overlook this.
On top of your regular income tax, you may be hit with an unexpected 15.3% tax when you file your return. It includes both Social Security and Medicare and is known as the “self-employment tax.” A hefty tax burden awaits those who are unaware of this possibility.
If you were an employee, you would be responsible for paying half of this, while your employer would cover the other half. Both are on your shoulders as a business owner.
Until now, I thought annual payments were sufficient.
Self-employed individuals must submit tax payments four times annually, rather than having their taxes withdrawn automatically like employees (called estimated tax payments).
This is the moment to learn about estimated payments if you were unaware of them before now and failed to submit your quarterly payments. It’s important to remember that if you skip these payments for a long period of time, you may end up owing a substantial amount of tax money, plus penalties, when you finally submit your taxes.
Interesting Related Article: “Half Of The Salary Going To Taxes? Learn How To Save It“