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Note: As part of the government’s ongoing response to COVID-19, recent legislation provides unemployment benefits, emergency funds, retirement account withdrawals, and loans and relief for the self-employed, including “gig workers.” Read more about what’s available here. You can also read our guide to COVID-19, which has answers about stimulus checks, debt relief, changing travel policies and managing your finances.
Picking up a side gig or becoming your own boss full-time can change a lot in your life, including your taxes. If you did any freelance or independent contract work last year, here’s a guide to help you understand some of the major to-dos in managing your taxes.
How it works: Your clients may send you a Form 1099-MISC showing how much they paid you during the year. You’ll need these forms to tally and report your income from your side gig.
What it means: “If they get a 1099-MISC with box 7 filled out, which is nonemployee compensation, that’s de facto self-employment income,” says Micah Fraim, a certified public accountant in Roanoke, Virginia. If you receive a 1099, don’t shove it in a drawer — whoever sent it to you also sent a copy to the IRS, so it wouldn’t be a good idea to leave that information off your tax return. Also, if you did work for a client that hasn’t sent you a 1099, you probably still need to report the money you earned there. Income, even if it’s paid in cash, generally has to be reported unless the law specifically exempts it.
How it works: Taxes are a pay-as-you-go arrangement in the United States. When you earn money, even from a side gig, the IRS wants its piece as soon as possible. That’s why employers withhold taxes from employee paychecks. But because you’re not an employee, you may need to make estimated tax payments during the year.
Major forms involved: Form 1040-ES, W-4
What it means: Every quarter or so, you may need to estimate your tax liability and pay the IRS. (How it works.) Waiting until the tax-filing deadline to do it all at once could mean paying penalties and interest.
If you have a partner with a regular job and you’re filing jointly, you might be able to avoid the quarterly hassle. “What we’ll typically recommend is that you get an estimate of what your total tax liability is going to be from all income sources and then just jack up your withholding from work. That way it’s automating it for you and you don’t have to go through this really conscious effort every quarter,” Fraim says.
What it means: At tax time, a lot of your record-gathering and number crunching will revolve around completing this form. As a result, you may need to spend more on advanced tax software or human tax preparers.
How it works: Generally speaking, expenses involved in operating your business can be tax-deductible. (How it works.) IRS Publication 535 lays out many of the rules. Plus, because of the recent changes to the tax law, you may qualify for a new deduction of up to 20% of your side-gig income.
Major forms involved: Form 1040
What it means: You could end up with a lower tax bill. If your total taxable income is below $157,500 for single filers or $315,000 for joint filers, you’re more likely to get this tax break. People over the limit may still get a partial break, but the rules get more complicated. “I’d say 90% of people should be able to expect to get that 20% deduction,” Fraim says. Don’t be shy about seeing a qualified tax pro for guidance.
How it works: You may need to pay self-employment tax.
Major forms involved: Schedule SE
The IRS imposes a 12.4% Social Security tax and a 2.9% Medicare tax on your net earnings. Typically, employees and their employers split that bill. But self-employed people pay the whole thing. (For 2019, only the first $132,900 of earnings is subject to the Social Security portion.) A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly.
What it means: To calculate how much you’ll owe, you may need to add Schedule SE to your tax filing to-dos. (How it works.).
What it means: “It lessens the pain of how much you’re having to shell out to the government if you’re funding your own retirement account,” Fraim says.
How it works: Taxes are complicated, and they can be even more complicated when you have a side gig. There are extra forms to fill out, along with many rules about the right way to report your income and even more rules about how to handle your expenses. Hiring someone to do your taxes could be a good move, but if you’re confident with taxes you might save money doing them yourself.
What it means: If the tax forms landing in your mailbox are completely foreign to you, take them to a human preparer. And if you want guidance and help with tax planning rather than just data entry and bill calculation, it’s probably better to visit a preparer. But be sure the preparer has a PTIN, is established in the area, has valid qualifications, can handle the workload involved with preparing your return and can represent you in front of the IRS if something goes wrong.
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