Today, from freelance writing to independent consultancies and contracts, self-employment options are diverse. This is primarily fueled by the pros of being your own boss and still making a substantial earning through multiple smaller jobs or “side hustles”. This had led to the emergence of something called the ‘gig economy’ which has replaced traditional salaried jobs with these hustles as a viable employment option. With more than a third of the US workforce now a part of the gig economy (as estimate from the creator of the Turbo Tax Preparation software), the unstructured work lifestyles are causing problems for the IRS as a lot of side hustle income goes unreported. Contrastingly, tax companies benefit from this job economy transition because more freelancers tend to adopt tax planning packages to track what happens to their money. The problem for the IRS stems primarily from the fact that they set the minimum reporting requirement amount as $600 keeping traditional jobs in focus. Unfortunately, this translates to people (especially millennials) assuming amounts lower than $600 need not be reported. This is untrue because as per reporting laws, ideally, all income needs to be reported and unreported income due to gig earning is simply adding to the already large tax gap.
Contact us to talk to a tax expert if you are behind in filing taxes or have unreported income in any previous years.
Tax Preparation – Staying on the IRS’s Good Side
Let us have a look at who contributes how much to this tax gap. Off the estimated $215 billion dollars of unreported yearly income to IRS, Millennials are the majority contributors (aged 20-36) followed by the subsequent age group of 37-52. Shockingly, the worst case of tax non-compliance is from unreported gig money earned by the those that can afford to cough up their taxes (these people typically earn $150K – $300K). Keep in mind that although people think they can get away with these tax skirmishes, the IRS will eventually detect this non-compliance. if you are a side hustler, the IRS considers you an independent contractor and you have to adhere to some rules if you want to stay out of the IRS’s naughty list!
Unlike usual jobs, self-employment earnings are not subject to withholding taxes but to something called ‘estimated tax’ liability. With traditional jobs, there are default tax periods during which taxes are payed parallel to when a person earns (pay-as-you-earn). This ensures the government has a continuous inflow of money coming in for its functioning. With gig earners, these estimated taxes are required to be paid every year quarter (usually the 15th of April, June, September and January of the subsequent year). Penalties apply for these terms separately which means a year end bulk payment could cost you more if you don’t pay quarterly.
Reducing Liability – Tax Saving Strategies for Your Gig Money
Some costs can be claimed on Schedule C as a business expense along with Form 1040 even if you are a gig earner! Remember though that these expenses need to be justifiable in necessity to your line of work. For example, if you are a tourist guide, expenses on things like tourist maps and water bottles for your clients can be claimed. Another example would be If you work from home. In such a case, a portion of your rent or utility expenses can be claimed to reduce your tax liability based on the nature of your business and earnings.
Transparent and Organized Bookkeeping
If an IRS audit ever takes place, one of the most important things is to keep track of and document all earnings and expenses to stay clear of any confusion and maintaining your clean tax record. Even with all your side hustles! Read about Small Businesses: Facing challenges In Tax Preparation
Hiring a CPA is utmost important for any business which is looking up to save their taxes. You can Contact Us for more information on your tax liabilities and insights.
Also read CPA: Every small business’s requirement
