Detroit Free Press
WWR Article Summary (tl;dr) As Susan Tompor reports, “Next year, many gig workers will be shocked as tougher tax reporting standards go into place and greatly expand how many 1099-Ks are issued to those who make extra money in the gig economy.”
Detroit bass player Grover “GT” Tigue knows too well about the wildly varying rhythms of the gig economy.
Tigue has been a musician 24/7 for the past 21 years — working on solo projects and playing over the years with groups including the No Boundaries Quartet, a hip hop group called Mama SOL & Tha N.U.T.S and an R&B funk band called Funkilinium.
But he saw his bookings crash for roughly a year during the pandemic.
The first few months were particularly frustrating, Tigue said, because he was doing 60 to 80 shows a year, including working weddings, before COVID-19 put a stop to live entertainment. He personally got the virus earlier in 2020.
“I didn’t start gigging in 2021 until about April,” Tigue said.
More work, including playing his bass guitar one September evening at the members-only Craft Cannabis Club in Detroit, picked up as the vaccines became more readily available.
One thing the pandemic should have taught everyone who is a gig worker — musicians, dog walkers, delivery drivers, you name it — is that you must keep good records when it comes to your business, mileage, expenses and income.
“It’s the little things like that that we as musicians or gig workers don’t know,” said the long-time Detroiter and 1982 graduate of Chadsey High School on the city’s west side, which closed in 2009.
Tigue, 56, knows musicians who faced more problems than he did trying to collect unemployment because many didn’t keep records. He collected unemployment benefits for a time but he’s still battling a fight for additional money that he claims he’s due.
Tigue studied accounting and finance at Olivet College in Olivet and once even made a 7-minute video in April 2000 to help younger musicians learn about how to seek financial assistance and better understand why they need to pay attention to taxes, keep track of income, and record expenses.
“I try to be the squeaky wheel in my circle of people who are phenomenally talented but don’t know anything else,” Tigue said.
“They don’t recognize how many things they can actually write off.”
The paperwork is needed at tax time — as Tigue learned too well after boxes of records, including his business journal, were lost in a move before he was audited many years ago.
“You need to get a good accountant.”
The downside of picking up extra gig work is that your tax bill might be way higher than you’d imagine. Many times, people don’t set aside the cash, pay taxes as they make money or even know the complicated rules when it comes to income tax obligations.
Next year, many gig workers will be shocked as tougher tax reporting standards go into place and greatly expand how many 1099-Ks are issued to those who make extra money in the gig economy.
While workers should report their income, experts say, much taxable income falls through the cracks and goes unreported now in cases where there isn’t a 1099.
On-demand workers can work in entertainment, drive cars, rent property, freelance, sell goods online, rent equipment, and provide creative or professional services.
“What’s happened is that the IRS was focused on a W-2 economy and created a system that matched W-2s and 1099s and never totally focused on a cash-based ‘gig economy’ such as we are moving toward now,” said Richard Davidson, chair of the taxation and business law department at Walsh College,.
“So, they are playing catch-up, trying to figure out how to raise compliance. Matching payments from payors is their best strategy,” Davidson said.
The tax change was buried inside the American Rescue Act, which was signed into law by President Joe Biden on March 11.
What kind of paperwork do you see?
In general, many people may be familiar with a Form 1099-MISC that can involve payments of at least $600.
Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said the 1099-MISC is still used for things like rents, royalties, prizes and awards, medical and health payments and payments to attorneys.
Fantasy sports players, for example, can receive a Form 1099-MISC when they win money.
But those who work in the sharing economy are often seeing a new tax form, known as the Form 1099-NEC. That form is used to report non-employee compensation for the 2020 tax year and beyond. The form was designed to streamline income reporting and applies to nonemployee compensation of $600 or more.
Uber, for example, is issuing a 1099-NEC to its drivers who meet the income standard instead of the 1099-MISC that was issued in the past.
Even if you did not receive a 1099-NEC because you earned less than $600, you’re still required to report your earnings.
What is a 1099-K?
Under the current federal income 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 transactions.
But that threshold will go away in 2022 when gig workers will see a huge shift. If you make at least $600, that’s going to trigger a 1099-K in the future.
As those working in the sharing economy receive more 1099s, they’ll be stuck reporting more of their income. The change will be felt by many, including those who pick up extra money by working for app-based companies and those who sell items online at spots like Etsy and eBay.
According to IRS Tax Gap studies, it’s estimated that 63% of income is misreported when third parties do not provide information to the IRS, such as with a 1099-K, according to a 2019 report on the gig economy by the Treasury Inspector General for Tax Administration.
Why some preach about taxes now
Davidson at Walsh College frequently brings up the tax-related challenges facing those who work in the gig economy to his students.
Many students enthusiastically offer ideas for making money in a gig economy, such as painting custom pet portraits or teaching private violin lessons.
But Davidson said they often don’t have a clue about recordkeeping and usually aren’t thinking through the tax implications.
It’s become a bit of a passion topic for Davidson, who had a 28-year career as in-house corporate tax counsel for Chrysler.
“The goal is to get them thinking about the fact that we’re moving away from a W-2 economy. Everyone is multi-gigging.”
Davidson said he’d like to see more education that focuses on the tax implications and recordkeeping issues, given that the gig economy is expected to grow.
“They’re getting into real trouble because they don’t know what they don’t know,” Davidson said.
The U.S. Bureau of Labor Statistics does not have a definition of the gig economy or gig workers, which can be quite broad, but has looked at various possible categories.
Many gig workers could fall into a group of about 5.9 million contingent workers — those who did not expect their jobs to last, according to 2017 data from the U.S. Bureau of Labor Statistics. That was 3.8% of those employed.
The data also identified 10.6 million independent contractors — or 6.9% of total employment.
The group could also include what’s called “electronically mediated employment” — or short jobs or tasks that workers find through mobile apps that both connect them with customers and arrange payment for the tasks.
In May 2017, the BLS said were 1.6 million such workers, accounting for 1% of total employment.
Why estimated tax payments may be needed
If you’re an employee and getting a regular W-2, your employer is withholding Social Security and income taxes from your paycheck.
But Davidson notes that independent contractors must be responsible for paying both the employer and employee share of Social Security taxes and paying income taxes in a timely fashion over the year.
You’d need to make quarterly estimated taxes on Form 1040-ES. The tax system is structured as basically a “pay as you go” system.
“Guess what? The IRS wants their money on a timely basis,” Davidson said.
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, the IRS notes that you risk facing penalty for underpayment of estimated tax. Interest is charged on tax underpayments, as well.
“You can’t afford to be educated 15 months later,” Davidson said.
Antonio Brown, a CPA in Flint, said he works as a musician too and gets paid as a 1099-NEC employee, so no taxes are taken out.
“The biggest mistake that people in the gig economy make is not withholding or paying quarterly estimate taxes on the money that they make,” Brown said.
They overlook the reality that income is subject to self-employment taxes in addition to federal, state, and sometimes local income taxes depending on the individual’s place of residence.
“The self-employment rate is 15.3% on the profits earned,” he said. “On top of that, you are responsible for the federal individual income tax rate, and if you are a Michigan resident, you’re paying 4.25%.”
While some people may realize they’re going to owe federal income taxes on their income, they don’t necessarily plan on self-employment taxes and they’re not thinking about making quarterly-estimated payments.
“I’ve had clients who’ve made $20,000 as a musician walk away owing over $4,000 in taxes for federal and state income taxes,” he said.
What can be done in the last quarter of the year is what is known as catch up payments. The federal quarterly estimates for the current tax year are due April 15, June 15, Sept. 15 and Jan. 15, 2022.
The last quarter of the year is always a good time to evaluate what has happened so far, Brown said, and see what can be done to reduce tax liability.
It becomes important during tax time because the eligible expenses are applied against the income earned, which reduces the tax liability.
Too often people who are new as self-employed drivers or other jobs in the sharing economy do not maintain good records of expenses.
Even something as simple as tracking business mileage, which can be a significant expense, can unfortunately be ignored by someone who isn’t savvy about taxes. You’d also want to track any fees paid to the app or website operator involved with the business.
What if you don’t have the money?
What’s worse, Davidson said, is many people may not be prepared for a big tax bill.
“Some people may panic and not file, which is the worst possible result,” Davidson said.
The statute of limitations never expires on an unfiled return, he noted. And the nonfiler could be scared to file in the future because they fear getting into trouble for the initial year when they didn’t file.
You also cannot ignore the 1099-K forms that show up during the tax season that report some of your income.
“If the IRS sees it, you better have it,” Davidson said.
The Internal Revenue Service even has a “Gig Economy Tax Center” to spell out tax obligations. The site defines the gig economy as “activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.”
Gig economy income is taxable and the IRS notes online that you must report income earned from the gig economy on a tax return, even if the income is:
•From part-time, temporary or side work
•Not reported on an information return form — like a Form 1099-K, 1099-MISC, W-2 or other income statement
•Paid in any form, including cash, property, goods, or virtual currency
Making money can be relatively simple for many, but the buck doesn’t stop there. You’ve got to figure out the extra steps to cover the tax bill, too.
(Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at [email protected])
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