In recent years, the gig economy has grown as a way for people to earn money and there are bound to be more people taking a dip into the pool this year. In a time when many people are unsure of their job prospects, every little bit of income can help bridge the gap until things get a bit more back to normal. Maybe this is why the IRS put out some tips to remember for those earning money in this way. There are a few things I want to add to this basic rundown, though.
First, there is frequently some misunderstanding about just how taxes work on such money earned. Most people start earning money with a job that gives you a paycheck where federal taxes, Medicare, and Social Security have already been withheld, and then there is not a thought given to such matters until it comes time to file taxes. When you are paid as a contractor, though, you are receiving money directly and nothing has been withheld. When tax times comes, you then may be surprised to find what you owe (including some employer portion of Social Security and Medicare because when you work for yourself, you’re both boss and employee).
If you just earned a small amount of money on the side, it is probably not going to have a giant effect on your situation when you fill out a tax return. Most of your obligation still will have been taken care of in your regular paycheck (note that you can have more withheld from that check to take care of it if need be). Problems can arise, though, when you start to make all your money this way.
So the second thing to remember is how much easier it is to handle such numbers when funds are siphoned out on a weekly basis instead of having to pay a lump sum at the end of the year. For example, if there’s $100 taken out of your paycheck a week for a year, it is money that you never see in your bank account and thus is not too difficult to figure out how to live without it. If you are a contractor ignoring your obligation to pay that money, however, it can be a lot more difficult to come up with $5,200 come early next year.
Like most things then, this can be handled with planning. If you are endeavoring into new income areas and don’t know how it’s going to affect your tax picture, contact us and we can help. After all, this is not a time when anyone needs any more stress or bad surprises, so working to avoid them will only serve you well.
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