Hey, Gig Worker! Prepare for a lot more work when filing your taxes.
Self-employed workers who quit their salaried jobs last year in the ‘Great Resignation’ – the biggest corporate exodus on record – could reminisce about the good old days on a payroll as they prepare their returns of income 2021.
The simplicity of having taxes automatically withheld from a regular company paycheck is a stark contrast to the maze of documentation, calculations and rules that construction workers must navigate to ensure compliance and determine the amount of tax they owe.
“There’s a big problem with people who don’t know the rules or don’t have the paperwork to calculate taxable income,” says Garrett Watson, senior policy analyst at the Tax Foundation. “This can result in either overpayment or underpayment of taxes.”
Underpaying is not advised. The IRS is notoriously hawkish when it comes to self-employment income, and it’s no surprise: some 58% of the $630 billion annual “tax gap” – the difference between what the IRS receives and what is owed to it – are due to under-reporting by self-employed workers such as freelancers and owners of partnerships and LLCs, according to the nonprofit Committee for a Responsible Federal Budget. increases as income increases.
Get ready for the self-employment tax sting
While income taxes for all workers come into effect once incomes exceed $12,550 for singles and $25,100 for couples under 65, self-employed people must declare their income and pay the 15.3% self-employment tax on net earnings – pay less deductible expenses – exceeding $400.
This includes a 12.4% Social Security tax on income up to $142,800 and a 2.9% Medicare tax with no income limit. Incomes over $200,000 for singles and $250,000 for couples are subject to an additional 0.9% Medicare tax.
Salaried workers also pay Social Security and Medicare taxes, but they split the 15.3% total with their employers and their shares — called payroll taxes — are automatically deducted from paychecks.
The IRS is trying to bring parity among all workers by allowing gig workers to deduct half of the self-employment tax. But that deduction alone doesn’t fully offset construction workers’ expenses, says Meghan Saunders, a registered agent in Towson, Maryland.
“A deduction reduces taxable income, but it’s not a dollar-for-dollar credit for taxes paid,” she says, adding that most gig workers pay slightly more in those taxes than salaried workers.
If you expect to owe at least $1,000 in taxes, the IRS requires that estimated taxes be paid quarterly over a tax year. By now, gig workers should have paid their estimated 2021 income and self-employment taxes.
If you didn’t pay quarterly, you’ll owe your full income and self-employment tax bill, plus late payment penalties, by this April 18 tax filing deadline. year.
Many people will find themselves in a difficult situation if they have not hidden part of their salary to cover taxes. “A lot of construction workers get income transferred to their bank accounts and spend it all,” says Terry Dickens, senior manager at Moss Adams, adding that a pay-as-you-go approach can avoid a big tax shock when filing. season.
Quarterly tax payments are based on income from a previous year, so when preparing 2021 returns, you can calculate your estimated first quarterly tax payment for 2022 – which is also due on April 18.
Rounding up income statements
Depending on sources of income, construction workers often have to put together a plethora of income records, unlike salaried workers who are given a tidy W-2 income list.
Traditional companies issue 1099 forms. Hiring platforms such as Uber, Lyft, and DoorDash issue 1099-K forms for workers who have made more than 200 transactions or earned more than $20,000. (For 2022, that IRS threshold drops to $600 so the agency can track the earnings of growing numbers of gig workers and help with enforcement efforts.) Other people may only have bank and personal records to declare their income.
Accounting for deductible expenses
A bright spot for gig workers is that, unlike salaried workers, they may be eligible for an eligible business income deduction on income of up to $164,900 for singles and $329,800 for couples, and employment-related expenses can offset income.
But even the benefits aren’t as simple as taxpayers might hope, says Dickens. “If you take a prospect to a baseball game, that ticket is not deductible. If you buy a hot dog, that expense is usually 50% deductible, but for 2021 it’s 100% deductible,” says Dickens. “It can be confusing.”
Beyond deductions for qualifying business income and self-employment taxes, don’t miss a host of others.
Expenses directly related to work — a lawn mower for a landscaper, software for an accountant — are fully deductible, as are health insurance premiums and pre-tax contributions to a Simplified Employee Retirement Plan, or SEP IRA. .
Entertainment-related expenses are not deductible, but business restaurant meals are fully deductible for 2021 and 2022 as part of pandemic relief efforts to support restaurants.
If you use your car for work, consider two options: deduct 56 cents for each kilometer driven for work or multiply the percentage of car use for work by the total annual car expenses, such as gas and the repairs. If the expenses were $5,000 and 25% of your car use was for work, you can deduct $1,250.
There are also two ways to claim home office deductions. The easiest way is to multiply the square footage of your office — with a ceiling of 300 square feet — by $5. For 200 square feet, you can claim a $1,000 deduction.
“The other method is to deduct costs attributable to your home office,” says Angela Anderson, Atlanta accountant at JustAnswer.
If your office takes up 10% of your home, you can deduct 10% of expenses such as utilities, mortgage interest, property taxes, and home repairs.
“Use the most beneficial method,” says Anderson. “Whatever you do, keep good records.”
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