The gig economy provides over 55 million people a way to earn income to meet their financial goals. Unfortunately, many workers don't realize they're not employees of the companies they work for but rather independent contractors, which causes them to make these two mistakes with their taxes that often lead to IRS trouble.
When you are an employee, your employer is responsible for reporting your income and the amount of taxes it withholds to send to the IRS, which is one reason why you get a W-2 at the end of the year showing how much was reported so you can verify you paid the right amount of taxes. As an independent contractor, however, that responsibility falls onto you.
Some companies will file 1099 forms with the IRS to report the amount of money they paid contractors and send those contractors a copy, but this isn't the norm. And even when gig workers get 1099s in the mail, they don't always know what to do with them or assume that, like employers, the gig companies they work for already paid their share of taxes.
Regardless of the cause, confusion over income reporting often leads gig workers to underreport the amount of money they made for the year or to fail to report any income at all. This causes problems with the IRS, such as audits and being hit with a penalty of up to 20 percent of the unreported income.
Thus, it's important to keep track of your gig earnings and report that amount when you file your taxes, especially if you don't receive a 1099 form from the company.
Failing to Pay Self-Employment Taxes
As an independent contractor, you are considered self-employed. It's important to understand this because people who are self-employed must pay a 15.3 percent tax on any money earned from their gigs. This money represents the portion of taxes employers pay on their employees' behalf for Medicare and Social Security.
However, since you're not an employee, the responsibility for paying that money falls on you. Additionally, this tax must be paid on a quarterly basis. The good news is that a portion of the self-employment taxes you pay can be deducted from your gross income to reduce your overall tax liability. It's essential, though, that you contact your local tax office to find out what the rules for paying self-employment tax are and adhere to them to avoid IRS trouble.
If you made these mistakes with your gig income and find yourself in trouble with the IRS, contact a tax attorney for advice on and assistance with resolving the problem.