How to avoid gig economy tax missteps
Article Published by: cnbc.com
Gig economy workers have good reason to be wary of the taxman.
Independent contractors are among the taxpayers most at risk of failing to accurately report their income at filing time, according to a new survey of enrolled agents — those federally licensed tax professionals who represent taxpayers in disputes before the IRS.
Earlier this summer, the National Association of Enrolled Agents polled 2,300 members about the most common reasons taxpayers get a CP2000 notice. That form means, according to the IRS, “the income and/or payment information we have on file doesn’t match the information you reported on your tax return.” Your tax bill could change as a result.
Failing to report payment for work performed as an independent contractor was the top reason agents cited for receiving a CP2000, with 60.2 percent noting it. Some 38.5 percent pointed to taxpayers who rush to file before they have all the necessary financial documents — something that may be easy to do if you’re juggling multiple 1099s and W-2s.
It’s not just missing income. IRS records show that self-employed workers and others who file quarterly estimated-tax payments are prone to get those wrong, according to a report last week from The Wall Street Journal. The number of filers penalized for underpaying estimated taxes jumped from 7.2 million in 2010 to 10 million in 2015, the paper found. Over that period, the average penalty dropped from $210 to $130.
To avoid a surprise come tax time, make sure you understand the tax obligations of your employment, said Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants. Consumers used to full-time work may not realize that federal and state taxes aren’t being withheld, or that they will also need to account for the self-employment tax to cover Social Security and Medicare.
Keep a detailed log of employers, earnings and whether the employer paid taxes on that paycheck, said Friday Burke, an enrolled agent and the founder of Dr. Friday Tax & Financial Firm in Nashville, Tennessee. Mismatches between what you report and what the IRS has in its records often come back to bad record-keeping.
“Usually it’s because they completely forgot something that happened,” she said, like a short-term project or one paid in cash. Even if an employer doesn’t send a 1099, the IRS requires you to report that income.
Set up a separate bank account and credit card to keep business paychecks and expenses distinct from personal ones, said Weston. That can help make it easier to track income, and ensure you don’t miss deductible expenses.
“People miss a lot of expenses,” she said. “They don’t know what they’re entitled to deduct, especially if they’re in the gig economy and especially if they have multiple endeavors.”
If you do hear from the IRS, don’t panic, said Burke. A CP2000 notice is an assumption the IRS is making based on its records, and it’s important to go through yours (and talk with your tax preparer) to see what’s correct.
ABOUT MICHAEL SMERIGLIO:
Mike Smeriglio III is a financial specialist. A licensed CPA since 1985, Mike has been providing tax preparation services to individuals and businesses for more than 30 years through his firm located in Greenwich, CT.