nasty secret of being a new entrepreneur is that your
tax bill might be way higher than youíd imagine.
youíre driving for Uber, delivering for Amazon,
picking up freelance jobs or otherwise participating in
the gig economy, you arenít working for a boss who is
required to withhold taxes from a regular paycheck. As a
result, youíre subject to some fairly complex tax
workers donít have the luxury of only paying attention
to income taxes in March or April, either. If you donít
pay enough taxes throughout the year, you could be hit
with steep penalties.
24 percent of American adults earned money selling
something online, renting out their homes or spare
rooms, or taking on a job, such as driving for a
ride-hailing service, according to a Pew Research Center
study issued in 2016.
how much do they know about the relevant tax rules?
About 34 percent of those reporting earning income in
the sharing economy did not know they needed to file
quarterly estimated tax payments, according Nina E.
Olson, the National Taxpayer Advocate, in a testimony in
Washington, D.C., in 2016. The figures were based on a
National Association of the Self-Employed survey.
about 43 percent did not set aside money to meet their
tax obligations or know how much they owed.
tax time, the gig economy triggers plenty of bewildering
questions for filers. So, where can an Uber driver make
a wrong turn at tax time?
Should I pay taxes as I work somehow during the year?
the first time in your life, you could be required to
pay quarterly-estimated taxes on the money youíre
making as an independent contractor. And youíre
looking at paying self-employment taxes involving Social
Security and Medicare.
taxpayers ó especially first-time independent
contractors ó donít realize they owe both income and
self-employment taxes," said Caroline Bruckner,
managing director at American Universityís Kogod Tax
Policy Center, which researches tax issues specific to
small businesses and entrepreneurs.
tax payments are required when a taxpayer is expected to
owe at least $1,000 in tax.
itís usually the taxes connected to Social Security
and Medicare that trip up workers in the gig economy.
example, someone who earns just $7,500 per year driving
for a ride-sharing company owes potentially $1,059.72 in
just Social Security and Medicare taxes. And that alone
would trigger quarterly-estimated filing requirements,
folks may realize theyíre going to owe federal income
taxes on their income, they donít necessarily plan on
self-employment taxes and miss making
quarterly-estimated payments," she said.
websites, including TaxAct.com, have a self-employment
tax calculator that can help you run some numbers to
avoid trouble in the future.
your taxes during the year has consequences, which can
include penalties and interest. The U.S. tax system is
considered a pay-as-you-go system.
taxpayers are getting slapped with penalties relating to
underpaying estimated-taxes during the year. About 10
million people paid such penalties in 2015 ó up 39
percent from 7.2 million people in 2010. The penalty
amount varies, but can be several hundred dollars,
according to the Internal Revenue Service.
employee can adjust a W-4 form to have more money
withheld from a paycheck. But someone who has a side job
or only works as an independent contractor could need to
pay quarterly-estimated taxes.
Internal Revenue Service has its own "Sharing
Economy Tax Center" online at www.irs.gov to
explain various tax rules.
What forms do I need?
services such as Uber and Lyft treat their drivers as
independent contractors, said Mark Luscombe, principal
analyst at Wolters Kluwer Tax & Accounting in
and Lyft note online that drivers receive 1099, not
income they earn is taxable whether they receive a 1099
or not. Sometimes they may receive a 1099-MISC, a 1099-K
or nothing at all," Luscombe said.
general, business owners issue a Form 1099-MISC to those
workers who were paid at least $600 in rents, services
performed by someone who is not your employee, prizes
and awards, or other income payments.
if you did not receive a 1099-MISC because you earned
less than $600, youíre still required to report your
workers in whatís dubbed Ďthe sharing economy"
also could be looking at a Form 1099-K.
Lyft website, for example, notes that drivers who earned
at least $600 in gross ride receipts from passengers in
the last year will receive a Form 1099-K. And drivers
who earned at least $600 from activities other than
driving, including bonuses or other incentives, in the
last year will receive a Form 1099-MISC.
the current tax rules, if a person is paid
electronically by credit card, debit card or third
parties, such as PayPal, those payment networks would be
required to issue a 1099-K when the taxpayer is paid at
least $20,000 or more and has more than 200 such
gig workers on average earn well below $20,000 and as a
result, arenít getting any Form 1099-K and donít
realize they even owe taxes on the income they
earned," said Bruckner.
said the IRS has found that thereís a 60 percent
likelihood that a taxpayer will misreport income if no
taxes are withheld from paychecks or no tax documents,
like a 1099 or W-2 form, are issued.
if you are under age 65 and single, you must file a tax
return if you earned $10,400 or more in 2017.
children who earn more than $6,350 of income in 2017
must file a personal income tax return and could owe
people with income below those limits might want to file
a tax return if they are due a refund, particularly if
taxes were withheld.
What kind of tax breaks can I get for my expenses if I
Rigney, senior tax research analyst at The Tax Institute
at H&R Block, said too often people who are new as
self-employed drivers or other jobs in the sharing
economy do not maintain good records of income or
something as simple as tracking business mileage, which
can be a significant expense, is often ignored by new
gig economy participants who arenít yet aware of the
tax savings those records provide," Rigney said.
expenses to track: Cell phone use for work, oil changes,
supplies, health insurance premiums, fees paid to the
app or website operator involved with the business.
all your expenses wonít necessarily generate a
deduction. Luscombe noted that indirect expenses may
require you to allocate for tax purposes between what
was spent on business and personal use. So if you use a
cell phone for personal calls, you need to take that
25 percent of your time on the phone is spent on
business, you may be able to deduct 25 percent of your
on 2018 tax returns, freelancers and on-demand workers
will want to pay attention to the new Qualified Business
Income deduction, which has some specific limitations.
operators may qualify for the new 20 percent deduction
from qualified business income," Luscombe said.
he noted that the 20 percent deduction would not include
investment income or reasonable compensation, Luscombe
now, the definition for "reasonable
compensation" is up in the air when it comes to a
sole proprietorship. The IRS may address that issue at a
later date, and if so, it could reduce the amount of
income that would qualify for the 20 percent reduction,
that new deduction, business owners can deduct 20
percent of the qualified business income if the taxable
income they report on their personal returns does not
exceed certain thresholds.
qualified business income deduction would end after tax
the process for complying with making estimated tax
payments can be cumbersome ó including oddly spaced
payment deadlines of April 15, June 15, Sept.15 and Jan.
15 of the following year.
services make it very easy to become a driver or rent
out a room but it doesnít end when you get that direct
deposit payment. You must take the extra steps to figure
out and pay your tax obligation," said Luis D.
Garcia, a spokesman for the IRS in Detroit.