Just a few weeks again, I wrote in regards to the significance of figuring out whether or not a employee/service supplier was an worker or unbiased contractor. That article was geared extra towards the enterprise receiving the providers, i.e., the potential employer.
But what if you’re on the opposite facet? What if you’re the service supplier and end up because the unbiased contractor, perhaps even what has come to be termed a “gig” employee? This is a crucial query.
Prior to the COVID-19 pandemic, the “gig” or “sharing economy” was already rising quickly. As individuals misplaced jobs or had their hours scaled again because of the pandemic, this development simply accelerated, as individuals regarded for tactics to complement misplaced revenue. Even as jobs are opening again up, many are staying put of their gigs, having fun with the liberty, flexibility and management it provides them over their lives and livelihood.
But with this comes responsibilities. Especially if you’re new on the sport, it can be crucial that you just perceive the tax and different obligations you will have.
For instance, not like an worker, gig employees and different unbiased contractors will not be lined by minimal wage legal guidelines or different protections underneath most state and federal labor legal guidelines. They are additionally not lined by state or federal unemployment applications. Further, fringe advantages, akin to an employer’s group medical insurance plan will not be accessible to an unbiased employee. You are by yourself for these, in addition to taxes (together with Social Security and Medicare, mentioned under) and retirement financial savings.
Also, many individuals have the thought, falsely, that simply because they’re creating wealth from a facet job or gained’t obtain a W-2 for his or her providers, that the revenue they earn isn’t taxable. Nothing might be farther from the reality. The tax code explicitly states that any and all revenue, from no matter supply, is taxable except exempted by the code.
One of the responsibilities you will have, and only a sensible apply basically, if you’re an unbiased employee is to maintain good data that monitor your revenue and the bills you incur in producing that revenue. I can’t emphasize this sufficient. Your enterprise bills can scale back your revenue topic to tax, and with out good data, if the IRS or state tax company audits you, you possibly can lose the advantage of deducting these bills you may’t substantiate.
For instance, in case you use your automobile for enterprise functions, hold a log of the enterprise miles you drive exhibiting the date, purpose and variety of miles pushed. There are apps akin to MileIQ that may assist scale back the burden of this vastly. Also, hold receipts for enterprise associated purchases are additionally a should.
One thought I extremely advocate is to determine a checking account via which solely business-related revenue and bills are accounted. Having it multi function place will likely be very handy come tax time. Plus, by not mixing enterprise and private bills in a single account, the IRS is much less more likely to go snooping round as a lot in search of “personal” bills that may be incorrectly deducted.
As far as taxes go, you not solely might be topic to state and native revenue taxes on the web quantity of what you earn, but additionally will likely be accountable for what is named Self-employment (SE) tax. This is often one of many large surprises for these new to the gig sport.
Essentially, SE tax is Social Security/Medicare (SSA) tax underneath a special identify. When you might be an worker, the employer pays half of the SSA tax, whereas the opposite half is withheld from the worker’s pay. When you might be self-employed, as gig employees and unbiased contractors are, you owe the entire quantity, not simply half. The SE tax is calculated and paid with your common revenue tax return every year.
Also, since you haven’t any tax withholding out of your earnings, it is best to take into account paying quarterly estimated tax funds. Doing so will assist scale back or remove a penalty that may be imposed for underpayment of estimated taxes. The due dates for estimated tax funds for a specific 12 months at the moment are April 15, June 15, September 15 of the present 12 months, in addition to, January 15 of the next 12 months.
A remaining level of data – you could obtain a tax info type from these to whom you present providers, together with on-line platforms with which you might be affiliated (suppose Uber, Lyft, VRBO, and so forth.). This might be within the type of a 1099-NEC, 1099-MISC or 1099-Ok. Again, as defined above, don’t suppose that simply because some revenue you obtain is NOT reported on such a type that you just don’t have to say it as revenue.
Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants (www.egpcpas.com), a full-service financial agency with places of work round Arkansas, and winner of The Sun-Times Reader’s Choice Award for Best Accountant