Now that the Tax Cuts and Jobs Act is fully in effect, let's take a look at some common tax problems you may be facing as a contractor or "gig economy" worker.
Failure to pay quarterly estimated taxes
Generally, people who are self-employed or work as contractors need to pay quarterly estimated taxes. Yet the gig economy has encouraged people to piece together their income by contracting with multiple companies. You may drive for both Uber and Lyft, for example, with a bit of Grubhub work on the side.
The general rule is that your estimated taxes are due on the 15th on each quarter month -- April, June, September and January. You are expected to pay either 90% of this quarter's estimated tax liability or 100% of the liability for the same quarter in the last year. Keep in mind that you could owe the self-employment tax and/or the alternative minimum tax.
Unfortunately, newbies to the gig economy may not be aware of their responsibility to pay quarterly estimated taxes. This can not only leave you with a huge tax bill in April, but it can also mean penalties and interest.
Underestimating quarterly estimated taxes
In practical terms, it's not a good idea to underestimate what you owe in quarterly estimated taxes. This could result in penalties and interest along with a hefty tax bill in April. It's usually a better idea to slightly overpay, so you'll receive a small refund instead.
Paying estimated taxes requires detailed accounting and meticulous record-keeping. Using last year's tax liability as a guide is acceptable, but it could lead to underpayment if you are doing better this year than you did last year. You won't face a penalty if you pay 100% of last year's taxes as an estimate, but you could still end up owing tax in April.
Failure to report all your income
With multiple W-2s and 1099s from various steams of income, you could easily overlook something. What about that gig you tried in May that didn't work out? If you're not organized, you might fail to report some of your income. You could then be slapped with a penalty and interest on any unpaid taxes.
Failure to file on time
Did you know that 20% of U.S. taxpayers file their taxes late? The complications from gig economy work can make filing your taxes more complicated and time-consuming, so be sure to leave yourself enough time before each quarterly deadline. Otherwise, you could be looking at penalties, additional fees, and interest on your late taxes.
Questions about filing your taxes? Contact an experienced tax attorney for help.