A Warning to the Self-Employed ...

It has been a growing trend, and one that does not promise to end anytime soon, that more people are earning money that does not come through a traditional W2 job. This can often be a side hustle for someone who does not consider themselves self-employed, or it can be someone who completely lives off that type of work and embraces the gig economy. Either way, this type of income is subject to self-employment tax. This is how the government gets you to pay into social security and Medicare when those monies aren’t being taken out of a paycheck.
And just so you know, enforcement of this could be about to go up.

The Treasury Inspector General for Tax Administration (TIGTA) released a report last month saying that the Tax Gap (difference between the taxes owed to the government and what is paid on time) for the self-employment portion was $69 billion (yes, really, with a B). TIGTA is an office that provides independent oversight of the IRS to promote fair administration of the tax system. And yes, it is fair that the IRS actually gets to collect the money that is owed to it. This seems to indicate that those who have been getting away without paying all their tax from side gigs could be subject to increased inspection as the IRS is urged to put more of its energies there.

If you are unsure about where you stand in this situation, that’s not a good sign. Just start from the standard rule that if you earn money, the IRS wants to know about it, and very likely wants to tax it. So if you are earning money, it most likely should be on your tax return.

I think a lot of this money that goes unreported does not do so through willful negligence. If someone is unfamiliar with the tax system, those various 1099 forms that come in the mail at the beginning of the year could be meaningless to them and left in a pile on the desk or thrown in the trash. This could be a young person making a little extra money, not feeling like they actually have a job, and then not understanding they have income to report and taxes to pay. This could be someone who has been in the workforce for years, knows how to handle their taxes off their one W2, and don’t realize that there is more to their tax picture.

Something else that this group does not understand, though, is that if they receive a 1099 form, a copy of it has also made its way to the IRS. Many of these can be of a small amount that slip through the cracks. Those small numbers obviously add up to a big one for the IRS, (really, with a B) and if they are going to put more effort into finding taxpayers who ignore them, it can be worth not ignoring them. After all, if it is a small number, it will only take a small number to handle the tax liabilities caused by it.

Let this be a warning then to be sure that you are reporting all that you should on your tax return. Yes, it is great to get some tax-free money, but it will not be tax free (and will come with penalties and interest) if the government finds you should have paid them some of it. And as always if you need help navigating through this part of your tax picture, we remain here to help.

Warmly,

Josh Bousquet
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