During the summer, many people are taking time off and enjoying working a little less, but there are others who are using their increased free time to do some extra work and bank some extra cash. More and more, this is happening by joining into the gig economy. I figured then that this may be a good time for some reminders about how this affects one’s tax picture.
And of course, as always when it comes to any money you make, the big thing is that the IRS is going to want to know about it. Also, the IRS is very likely going to know about it if you make over $600 doing any type of service or selling any type of goods, for you will be receiving a 1099 that reports this income and a copy of that also goes to the IRS.
Where things really turn with the gig economy and taxes comes with the fact that you are not considered an employee when working within it. When you receive a regular paycheck and a W2 reporting this income at the end of the year, most of your tax obligations are probably being taken care of (especially if we are only talking about some part-time summer work) with what is withheld from your pay. When you receive payment as a contractor, though, none of these obligations are taken care of before you get that money.
And this does not just include federal and state withholding taxes. It is still possible that someone will only make a small amount of money over a year and not be liable for anything in that area. No matter how little is made, however, gig workers will still be responsible for all Social Security and Medicare taxes on their income.
So, if someone has a job as an employee outside of the gig work, one may want to think about submitting a new W-4 form to their employer and have more taxes withheld from their paycheck to help take care of those outstanding obligations. If one does not have that option, it’s possible to make quarterly tax payments throughout the year to help offset these taxes – and in fact, if enough money is being made, the IRS may even require these payments to happen.
None of this means that making money in this type of way is a bad idea, there are certainly advantages to it for people in many situations. There are just tax ramifications that should be considered and thought about before they become a surprise come tax time next year.
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