- The Six Most Common Gig Economy Tax Problems
- Gig economy jobs turn workers into small business owners
- The 6 most common problems when filing taxes as a self-employed worker
- Gig economy taxes are always on. Here’s where to get help
- Filing self-employed taxes
- Getting help with IRS audits and notices
- Tax Season Will Look Different This Year. Here Is What You Need to Know
- 1. You Might Receive a Surprise Bill (or Reduced Refund) for Your Unemployment
- 2. Claiming a Missing Stimulus Payment or an Additional Stimulus Payment on Your Tax Return
- 3. You Can Now Claim Charitable Contributions Without Itemizing
- 4. New Earned Income Tax Credit (EITC) Lookback Rule
- 5. Special Carryover Provisions for Flexible Spending Accounts
- 6. Teachers can Claim Personal Protective Equipment on Their Tax Return
- Key Filing Dates for the 2021 Tax Season
- A Preliminary Look at 2019 Tax Data for Individuals
- Tax Liability
- Filing Methods
- Tax Returns and Withholding
- Child Tax Credit
- Section 199A Pass-through Deduction
The Six Most Common Gig Economy Tax Problems
Gig economy jobs have boomed in recent years and even more so since the onset of the coronavirus pandemic. With new business opportunities from companies such as Uber, Airbnb, and DoorDash, taxpayers are finding it easier than ever before to work for themselves. As workers take on these new jobs, they’re probably not thinking of what the gig economy means for their taxes.
Have questions about how gig work affects your taxes? Check out our Guide to Gig Worker Taxes.
Gig economy jobs turn workers into small business owners
Many people are surprised that as an independent contractor, they actually own a small business in the eyes of the IRS. And small businesses have extra tax rules – and potentially more IRS audits and notices. This is true whether your gig economy job is your primary source of income or your side hustle.
It’s important to know that filing taxes as an independent contractor can get complicated. You’ll usually have more requirements to file and pay taxes. That means things :
- Quarterly estimated tax payments
- Payroll tax deposits and filings
- Reporting payments to contractors each year
- Reporting sales tax
- State and local licensing requirements
Because of all these rules, you’ll interact a lot more with the IRS and your state. And, these tax authorities are much more ly to question you.
The 6 most common problems when filing taxes as a self-employed worker
- “I didn’t know I had to pay self-employment taxes.”
This is a common miss for people who are newly self-employed.
You may be surprised when you file a return and find out that, on top of your income taxes, you’ll owe another 15.3% tax. This is called self-employment tax and it covers Social Security and Medicare taxes. It can result in a large tax bill if you didn’t know about it.
If you were an employee, you’d pay half of this amount, and your employer would pay the other half. As a self-employed person, both are your responsibility. On the bright side, a special tax deduction for independent contractors (self-employed individuals) lets you deduct half of your self-employment tax to offset your income.
- “I didn’t know I had to pay throughout the year.”
Instead of having taxes automatically withheld ( employees do), self-employed people have to send in tax payments four times a year (called estimated tax payments).
If you didn’t know or forgot about sending in your quarterly payments, the best time to learn about estimated payments is now. But take note: missing these payments for several months may mean you’ll owe a big tax bill plus ly penalties when you file.
If you can’t pay, you can ask for an extension or set up a monthly payment plan (called an IRS installment agreement) when you file.
- “I keep getting behind in paying taxes.”
Self-employed people sometimes get behind in paying estimated taxes. When they do, they often file and end up with large tax bills they can’t pay.
If you already have a payment plan with the IRS but then file, owe and fail to pay, you could be considered as defaulting on your agreement.
You’ll spend more money to set up a new installment agreement, owe more penalties and interest, and interact more with the IRS.
If you owe tax on a later return, you can potentially add it to your current installment agreement, but again it is ly more penalties and interest would be assessed.
If your tax bill adds up to more than $50,000, there are other consequences. The IRS may ask for more information about your financial situation to set up a payment plan, and the IRS can file a federal tax lien, which typically hurts your ability to get credit.
- “I didn’t report cash payments.”
Depending on the type of job you have, the IRS may receive copies of forms that validate your income – such as Form 1099-NEC or Form 1099-K. However, many small businesses, especially gig economy job workers that operate in cash, are on the honor system for reporting their income.
And with cash-intensive businesses, the IRS has few, if any, Forms 1099 to validate the income. It makes sense then, that every IRS audit of small businesses starts with scrutiny about whether the business reported all its income.
- “I ‘wrote off’ personal expenses.”
This is another major area where the IRS looks in small business audits.
New small-business owners often deduct certain expenses, cars, cell phones, in-home offices, and travel and meal expenses. But the IRS views many of these expenses as personal (and not deductible) – unless you can prove that the expenses were business-related.
The takeaway: Keep excellent records.
- “I didn’t file on time (or, at all).”
Many small businesses put off filing because they can’t pay their taxes. Procrastinating this causes many businesses to run up large tax bills and penalties.
The failure to file penalty is 5% per month (or partial month) that the return is late. If you file your return more than 60 days late (including extensions), the minimum penalty is 100% of your unpaid tax or $435, whichever is smaller.
As you can see, it’s better to file on time even if you can’t pay right away.
As mentioned above, the IRS receives information about your income through various tax forms. For example, in recent years, the IRS has identified many nonfilers with Form 1099-K, which reports payments the business receives from debit/credit cards and third-party processors, such as PayPal.
Many online-retail small businesses in particular are now having to reconcile their revenues to this form. Independent contractors that don’t file taxes and receive this form are experiencing IRS delinquent-filing notices and IRS enforcement actions.
Gig economy taxes are always on. Here’s where to get help
If you’re a business owner, including an independent contractor in the gig economy, taxes should be something you’re on top off all year long.
Start with keeping good records, making estimated tax payments to limit your tax balance when you file, and always filing an accurate return at the end of the year.
Filing self-employed taxes
When you’re ready to file your taxes as an independent contractor, you can rely on H&R Block to be there for you.
With H&R Block, you can file your taxes confidently knowing you’ll get your max refund – or you’ll get your money back. We’ll help you find all the personal and business deductions you’re entitled to.
Check out these filing options:
H&R Block Online Deluxe for independent contractors with no expenses to deduct.
H&R Block Online Premium for independent contractors with expenses to deduct.
Need a little help along the way? Don’t worry, with options such as Online Assist, the help of a knowledgeable tax expert is never far away.
Getting help with IRS audits and notices
Small-business owners can continue to see more of the IRS after filing. Knowing your requirements and preparing for more IRS interaction (and potentially scrutiny) is the key to minimizing tax surprises for small-business owners.
If you’ve run into any of the six most common tax traps, a tax pro can get to the bottom of your issue and even fix it with the IRS for you. Learn how it works with H&R Block’s Tax Audit & Notice Services.
Tax Season Will Look Different This Year. Here Is What You Need to Know
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Tax season officially kicked off on Feb. 12 after being delayed more than two weeks past its regular start date.
And beyond a slightly shorter filing window, things are going to look different this year for millions of Americans. From reporting unemployment benefits to claiming a missing stimulus payment, you can expect many changes for this tax filing season.
Here are six changes and rules that might affect your 2021 taxes.
1. You Might Receive a Surprise Bill (or Reduced Refund) for Your Unemployment
Unemployment spiked during the beginning of the Covid-19 pandemic; at its worst, more than 6 million Americans per week initially filed for unemployment. And if you are one of the millions who received unemployment benefits in 2020, you may be in for a surprise tax bill. That’s because unemployment compensation is considered taxable income by the IRS.
This isn’t new, but with millions of Americans filing for unemployment for the first time in 2020 due to pandemic-related job losses, many will learn this when you sit down to file your taxes..
You have to report your unemployment benefits on your tax return. And yes: This is the case even if you opted to have taxes withheld from your benefits. Depending on your tax situation, you may still owe taxes if your withholdings were not enough.
If you received unemployment benefits in 2020, you should receive Form 1099-G from your state. You can see how much you received in box 1. You should report this amount on line 7, Schedule 1 of your Form 1040 (federal income tax return).
It is also essential to report any taxes that were withheld from your benefits, which you can see in box 4 of your 1099-G. You enter this on line 25b of your tax return.
There are some cases where you aren’t required to report your unemployment benefits. For example, if your income is below the IRS’ income filing requirements, you don’t have to worry about filing a return. But if you expect a tax refund or you’re eligible to claim the Recovery Rebate Credit, it may be in your best interest to file.
2. Claiming a Missing Stimulus Payment or an Additional Stimulus Payment on Your Tax Return
The IRS announced on Feb. 16 that all first and second stimulus checks have been sent, so if you didn’t receive your stimulus payments or received a partial payment, you will have to claim them on your 2020 tax return.
You might qualify for additional stimulus money if you experienced some life changes, including:
- Your income declined in 2020 compared to 2018 or 2019
- You gave birth to or adopted a child under the age of 17 by Dec. 31, 2020
- You were no longer considered a dependent for the 2020 tax year
However, there are some instances where you can’t claim the credit on your tax return:
- You received a full stimulus payment for the first and second round
- Someone can claim you as a dependent for the 2020 tax year
- You are not a U.S. citizen or a resident alien
If you need to claim all or part of the Recovery Rebate Credit, You can do so by first completing the Recovery Rebate Credit worksheet, which will ask you a series of questions to ensure you qualify. The worksheet will tell you the amount you can claim on your tax return.
The credit will either increase your tax refund or reduce the amount of taxes you owe. Un the Economic Impact Payments distributed in the first and second round, if you owe back taxes or other government debts, any refund may be applied to them.
Read more:How to Use the Recovery Rebate Credit To Claim Your Missing Stimulus Payment
3. You Can Now Claim Charitable Contributions Without Itemizing
Before the CARES Act passed in March 2020, you could only deduct charitable contributions if you itemized your tax deductions. Itemized deductions allow you to subtract certain expenses on your tax return if the amount is greater than what the standard deduction allows.
In 2020, the standard deduction was $12,400 for single taxpayers and $24,800 for married couples.
However, the CARES Act included a provision that allows you to deduct charitable deductions up to $300 in cash for 2020 without itemizing.
But before you claim this deduction on your tax return, make certain your donation qualifies.
You must have donated cash, so investment securities, and all the kitchen appliances you donated to Goodwill won’t qualify. Also, the organization you donated to must be tax-exempt.
You can check to see whether your charitable organization is considered a tax-exempt organization by using the IRS’ Exempt Organization Search tool.
The IRS encourages taxpayers to keep a record of the charitable donations, which might include a receipt, acknowledgment letter, canceled check, or credit card receipt.
4. New Earned Income Tax Credit (EITC) Lookback Rule
Due to the Covid-19 pandemic, millions of Americans lost their jobs or worked fewer hours than in 2019. According to the U.S. Bureau of Labor Statistics, unemployment rates increased in nearly all metropolitan areas in 2020 from the previous year.
And since the Earned Income Tax Credit (EITC) is your percentage of earned income, which includes wages and compensation (excluding unemployment income), earning less may only qualify you for a smaller credit—or none at all.
To compensate for this, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The act includes a lookback provision, which allows you to choose earnings that would generate the highest EITC credit, from either the 2019 or 2020 tax year.
5. Special Carryover Provisions for Flexible Spending Accounts
If you have an unused balance in your 2020 flexible spending account (FSA), you may be in luck.
The Consolidated Appropriations Act 2021 passed in December included a provision to allow unused balances for both 2020 and 2021 plan years to carry over to the following year (normally, they’re “use it or lose it”). These changes apply to both health and dependent flexible spending accounts.
You should contact your employer’s FSA administrator to determine the next steps to carryover unused funds.
6. Teachers can Claim Personal Protective Equipment on Their Tax Return
If you are a teacher or K-12 educator, you can deduct up to $250 for unreimbursed expenses for personal protection equipment purchased for your classroom in 2020 on your tax return. You would include this amount on Line 10, Schedule 1 of Form 1040. These items include face masks, hand soap, sanitizing wipes, gloves, and other personal protective equipment.
Key Filing Dates for the 2021 Tax Season
There have been some key changes to tax season dates. Here’s what you need to know.
February 12: The IRS officially started the 2021 tax filing season to accept and process tax returns.
The first week of March: Taxpayers who claimed the earned income tax credit and the additional child tax credit will start to receive their tax refunds if filed electronically with direct deposit.
May 17: The last day for most Americans to file their 2020 Form 1040 federal tax returns unless you request a tax extension. The IRS announced on March 17 that individuals have until May 17 to file. Louisiana, Oklahoma and Texas have until June 15 to file their taxes, due to the recent winter storms.
October 15: If you filed a tax extension, this is the last date to file your 2020 Form 1040 federal tax return.
The IRS encourages taxpayers to file their tax returns electronically and use direct deposit to receive their tax refunds sooner. If you elect to file your tax return via a paper return, you can expect processing to take longer..
A Preliminary Look at 2019 Tax Data for Individuals
The IRS has released tax data covering the first 30 weeks of the tax season, providing a glimpse of how individual taxpayers fared in 2019, the second tax year under the Tax Cuts and Jobs Act (TCJA). The preliminary data provides aggregate information by income group on a range of topics, including sources of income as well as deductions and credits taken by taxpayers.
It is important to note that this data represents about 95 percent of filers and excludes those that requested a six-month filing extension. For this reason, the data represents about 82 percent of total tax liability that will be reported on individual income tax returns filed for tax year 2019.
In a previous piece, we outlined how the TCJA reduced effective tax rates and increased use of the standard deduction, among other changes, for all income groups in 2018 compared to 2017. When we account for the 2019 data, a similar trend emerges.
As illustrated below, the TCJA reduced effective tax rates, or total tax liability divided by an income group’s total adjusted gross income, for all filing groups in 2019 compared to 2017. Even though taxpayers in each income group saw a tax cut on average, individual circumstances vary.
Taxpayers making less than $20,000 experienced negative effective tax rates due to refundable tax credits including the Additional Child Tax Credit (ACTC) and Earned Income Tax Credit (EITC). Refundable tax credits allow taxpayers to receive a refund from the government when the amount of credit they are owed surpasses their tax liability.
One of the most significant changes introduced by the TCJA was the expansion of the standard deduction. The TCJA also directly limited or eliminated a number of itemized deductions.
As the chart below shows, the share of taxpayers who itemized went down across income levels. According to the returns filed through the first 30 weeks of the year, 9.
6 percent of filers chose to itemize their deductions on their 2019 tax returns.
Tax Returns and Withholding
Tax filing season brings up many questions for taxpayers, such as, “How big will my tax refund be?” or, “Will I have a balance due when I file taxes this year?” Changes to withholding tables in the aftermath of the TCJA resulted in lower-than-expected refunds, but it is important to remember that decreased tax refunds do not necessarily translate to increased tax liabilities.
The chart below shows the aggregate amount of refunds returned to taxpayers in each income group through the 30th week of the filing season in 2017 and 2019.
While total refunds in 2019 fell for some income groups relative to 2017, effective tax rates dropped across all income groups over the same period.
This pattern is similar to tax year 2018, when aggregate refunds also fell for most income groups.
Child Tax Credit
The TCJA increased what parents receive from the Child Tax Credit (CTC). The maximum credit amount increased from $1,000 to $2,000 per child and the refundability threshold increased from $1,000 to $1,400. (The refundable portion of the CTC is referred to as the Additional Child Tax Credit (ACTC).
) Additionally, the income level eligibility for the credit increased from $110,000 to $400,000 for married filers ($75,000 to $200,000 for single filers) while the earned income threshold for the ACTC decreased from $3,000 to $2,500.
Overall, these changes meant that more filers were eligible for a larger credit.
As shown in the chart below, the average combined benefit from the CTC and ACTC rose across all income groups (excluding higher earners who are ineligible for the credit) from 2017 to 2019.
Due to the higher income phaseouts, high-income taxpayers saw significantly greater benefits from the credit in 2019 than in 2017.
This change and the larger standard deduction helped offset the effects of suspending the personal exemption within the individual income tax.
Section 199A Pass-through Deduction
The Tax Cuts and Jobs Act of 2017 created a deduction for households with income from pass-through businesses—companies such as partnerships, S corporations, and sole proprietorships, which are not subject to the corporate income tax.
The pass-through deduction allows taxpayers to exclude up to 20 percent of their pass-through business income from federal income tax.
Upper-income taxpayers are subject to several limits on the deduction, intended to prevent abuse, which are the economic sector of each business, the amount of business wages paid, and the original cost of business property.
As illustrated below, in tax year 2019, income groups of $100,000 and below accounted for 55 percent of the returns claiming the pass-through deduction, but only 20.3 percent of the benefits. Income groups above $100,000 accounted for 45 percent of returns claiming the pass-through deduction, but nearly 80 percent of the benefits.
The data continues to illustrate that the net effect of the Tax Cuts and Jobs Act was to reduce effective tax rates across income groups. In 2019, the TCJA again expanded the use of several deductions and credits, made the standard deduction more favorable than itemizing, and lowered taxes for most taxpayers.
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