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Gig Workers To Get Hit With Big Tax Surprise Next Year

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]) Distributed by Tribune Content Agency, LLC.

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