Most U.S. workers meet their annual tax responsibilities via paycheck withholding.
Here you give your boss the information needed to calculate just how much income tax should come out of each paycheck so that you're Goldilocks at tax-filing time, not owing the U.S. Treasury too much or too little.
The sharing economy has thrown a wrench into this system.
Lots of folks with traditional 9-to-5 jobs are hustling on the side to earn extra cash. Others have committed full-time to gig economy work.
Job freedom but more tax tasks: These work changes mean more of us now face added tax taxes, specifically paying covering the taxes on our side job earnings ourselves through estimated tax payments.
This means paying the income taxes due, as well as the self-employment tax amounts that are the entrepreneurial equivalent to FICA, the Federal Insurance Contributions Act that directs money to the Social Security and Medicare programs.
Why? Can't you just wait until you file your 1040 next spring and reconcile things?
The U.S. tax system operates on a pay-as-you-earn system. The reason is simple. Uncle Sam needs cash throughout the year to cover his many federal programs. Payroll withholding is the most obvious example of this tax collection method.
For self-employed workers, even those who just pick up a few extra bucks through random sharing economy jobs, these payments must be made as estimated taxes.
Plus, if you don't file your estimated taxes, you'll likely end up owing penalties and interest when you do file.
Gig economy tax tips, warnings: I've written about the tax duties of independent contractors (or freelancers or gig workers or whatever you want to call them/your/ourselves (yes, I'm one, too) may times here on the ol' blog.
Most recently I discussed warned how the Internal Revenue Service keeps a closer eye on us because our being-the-boss situations make it easier to cheat Uncle Sam.
If you've been following those earlier side hustle tax tips, good for you. You should be in good shape as far as your freelance taxes.
Sharing economy paycheck checkup: However, in light of the Tax Cuts and Jobs Act changes that took effect this year, you now need to make one more tax move.
Do a side hustle paycheck checkup.
This review of your gig economy income and whether you're paying enough in estimated taxes under the new tax rates will help save you from the penalties and interest I mentioned earlier.
And those extra charges really add up. The IRS says that in recent years it has seen the number of taxpayers who paid the estimated tax penalty jump, specifically from 7.2 million in 2010 to 10 million in 2015. That's an increase of nearly 40 percent.
Online tools, publications can help: Don't be one of those penalty payers. Use the IRS' online tools to help you determine how much you'll owe.
The IRS recommends its updated online withholding calculator. Once it figures your expected tax amount, it will suggest steps you should take to avoid an underpayment penalty on your sharing economy income.
If you're tax situation is more complex, the IRS recommends you check out its Publication 505 instead. The booklet includes worksheets and examples to guide taxpayers through these special situations.
Folks who might want to electronically thumb through Publication 505 include employees who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents. It also can help if you receive non-wage income such as dividends, capital gains, rents and royalties.
Plus, Publication 505 helps taxpayers account for estimated tax payments, whereas the withholding calculator does not.
Whichever method you use to evaluate and adjust your tax payments for sharing economy income, do so soon. The quicker you make the necessary changes, the small your eventual tax bill and potential underpayment penalty.
You also might find these items of interest:
- Revised 1040-ES takes new 2018 tax law into account
- IRS withholding calculator updated to reflect new tax law
- Got a refund? Owe the IRS? Time for a Paycheck Checkup!