How Gig Economy Worker Can Prevent Tax Penalties !
What is a Gig? The Oxford dictionary defines a Gig as “a performance by musicians playing popular music or jazz in front of an audience; a similar performance by a comedian”.
What is gig economy?
But , nowadays, a gig is not just music or jazz but all sorts of small jobs that a person or entities does for a price.The growth of internet and consequential online businesses have added another dimension to economy called “gig economy”.The volume and numbers of small jobs or on-demand services are so great that a whole lot of young and skilled persons are earning income ,specially through a digital platform like an app or website.Therefore , “Gig Economy” is defined by Oxford dictionary as “a labour market characterised by the prevalence of short-term contracts or freelance work as opposed to permanent jobs”.The following list is just few examples of gig works that people do and earn :
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Website creation
- Voiceover or video recording against fee
- Writing articles, blogs against fee
- a graphic designer who charges based on an hourly rate; or
- a wedding photographer charging a flat rate
- Sell goods online
- Rent equipment
- Provide any kind of creative or professional services
- Provide other temporary, on-demand or freelance work
The list of gig economy works or services are endless.
One central rule to keep in mind is that if you are not employee of any one and do jobs or give services against a fee, you are a gig worker and part of gig economy
What a gig worker must know about tax compliance?
Here are three simple rules that every gig worker must know and follow
- File tax return
- Pay estimated Tax
- Keep records of earning & expense
Why & how to file tax return?
If your net earning from self employment is more than $400 , you will have to file tax return by due date . Else there will penalty for failure to file. A self employed person or gig worker should still file a return specially if there is a business losses because you can carry forward the business loss to adjust with business income in future years.If you do not file, you loss the benefit of carry forward business losses.
If you are worried about how to file tax return ,IRS has signed agreement with tax filing software vendors to provide free filing. Read 10 free online tax filing IRS approved services for 2020. It is better if you have printed tax filing cheatsheet.
The tax return has to be filed within due dates , which is extended on account of Coronavirus to 15th July for 2019 returns for due date was 15th April. 12 Changes For 2019 TAX Returns You Need To Remember
Why & how to pay estimated tax?
You may have to pay estimated tax in the current year . This depends on how much tax was withheld on your gig earnings. If there is shortfall in taxes as on date of filing tax return, you are liable to penalty for failure to pay taxes.
How to calculate estimated tax?
You can use Worksheet 2.1 in IRS Form 1040-ES, Estimated Tax for Individuals to figure out whether you must pay estimated tax. You’ll need to calculate this information:
- adjusted gross income,
- taxable income,
- deductions, and
You can also use IRS tool – Tax Withholding Estimator.Click here for more detailed information on how to calculate your payment. Or check out the IRS Publication 505 (2017), Tax Withholding and Estimated Tax.
What are the due dates for estimated tax payments?
Estimated tax , if any has to be paid in four quarters. These are
- April 15 for payment period January 1–March 31
- June 15 for payment period April 1–May 31
- September 15 for payment period June 1–August 31
- January 15 for payment period September 1–December 31
For the year 2020, the date for first quarter of estimated tax payment has been extended on account of Covid-19 pandemic.You should fill Form 1040-ES and can pay online the estimated tax Pay online or by mail or phone
If you do not pay estimated tax , there is provision of levy of estimated tax penalty. Read FAQ on estimated tax penalty
How and what records to be maintained by a gig worker?
You will have to maintain books of accounts. In other words, the gig workers must keep record of earnings and related expenses.This will help self employed persons in proper accounting of income, deduction of expenses and finally complete the tax return error free. Following publication by IRS will help gig workers in further reading on subject of record keeping :