The sharing economy has allowed more people to add side gigs. It’s also provides others enough income to leave traditional 9-to-5 positions. Understanding the tax implications, however, is crucial.
It’s a good time to analyze whether you are on track. You still enough have time in the year to make adjustments if you are not. What does employee versus independent contractor have to do with it?
Estimated quarterly tax payments
If you are driving for Uber, renting a space through Airbnb or selling books or health care products through Usborne or Arbonne, you have probably been categorized as an independent contractor. In this employment relationship, the company does not withhold any taxes from what they pay you. At the end of the year, they report what they paid you to the IRS on a form called a 1099.
The IRS requires you to pay-as-you-go and make estimated quarterly payments to cover income and self-employment taxes.
How do you determine the amount you owe? If you have been in business for several years, you can use last year’s income as a basis for determining how much to pay. If business has substantially increased or decreased, this is the time to make changes.
For side gigs predicted to bring in less than $1,000 of income, you may be able to wait until tax time. If you also have a traditional employee position, your employer withholding may even cover the amount you will owe. You probably will need to complete a Schedule C, however, so track business expenses that offset your income. The distinction between hobby losses and business expenses is important to review as well.
In some professions the categorization as employee or independent contractor is challenging. The rules are complex. When working full-time for an employer at their office doing what they request following their process, you probably should be an employee.
This is the time of year to ask questions if your employer is not withholding taxes from your pay or the amount seems too small. Fixing a payroll issue now can avoid a tax bill you cannot pay next year.