In the dynamic landscape of the gig economy, where flexibility and independence are highly valued, many workers find themselves navigating the complex terrain of self-employment taxes. While the gig economy offers opportunities for individuals to earn income on their own terms, it also comes with a set of responsibilities, particularly when it comes to filing taxes. Here are the top five tax issues gig workers run into with their taxes and how to avoid them.
Failure to Set Aside Money for Taxes
One common pitfall for gig workers is not setting aside a portion of their earnings for taxes throughout the year. Unlike traditional employees who have taxes automatically withheld from their paychecks, gig workers are responsible for managing their own tax obligations. Failing to set aside money regularly can lead to a significant financial burden come tax season.
To avoid this mistake, gig workers should establish a dedicated savings account and consistently allocate a percentage of their income for taxes. A solid rule of thumb is to set aside 30% of your business income for taxes. Be sure you know every tax you are responsible for. For example, gig workers will need to pay self-employment taxes while regular W-2 workers do not.
Underreporting Income
Some gig workers inadvertently underreport their income, either due to a lack of understanding or an attempt to reduce their tax liability. This mistake can have serious consequences, including penalties and interest on unpaid taxes. Remember, now more than ever is a bad time to owe the IRS. Inflation has caused higher than normal IRS penalties and interest rates.
To avoid this error, gig workers should maintain accurate records of all their income, including earnings from various platforms and any cash transactions. You should receive IRS Form 1099-K from these platforms. Utilizing accounting software or hiring a professional can help ensure that all income is properly accounted for.
Overlooking Deductions and Credits
Gig workers often miss out on valuable deductions and credits that can help reduce their tax liability. Common deductible expenses for gig workers may include mileage, home office expenses, and equipment costs. Additionally, they may be eligible for the Qualified Business Income (QBI) deduction and other tax credits. Failing to take advantage of these opportunities means potentially paying more in taxes than necessary.
Gig workers should stay informed about tax laws and work with a tax professional to identify and claim all eligible deductions and credits. For example, as previously mentioned, gig workers must pay self-employment taxes. However, they may deduct half of the 15.3 percent self-employment tax during tax time. Do your research on what you can deduct but be careful not to deduct things you are not eligible for.
Neglecting Estimated Tax Payments
Unlike traditional employees, gig workers typically don’t have taxes withheld from their earnings throughout the year. Instead, they are responsible for making quarterly estimated tax payments. Neglecting these payments can result in underpayment penalties. Currently, underpayment penalties are 0.5% of the tax owed and it is due each month that the tax goes unpaid, for a maximum of 25% of the total balance.
To avoid this mistake, gig workers should calculate their estimated tax liability and make timely payments to the IRS. Keeping track of income and expenses throughout the year can help with accurate estimations. The IRS offers a helpful online estimated tax payment calculator to make this step easy for gig workers.
Misclassification of Employment Status
Gig workers must correctly classify their employment status, whether they are considered independent contractors or employees. Misclassification can lead to tax issues and potential legal consequences. Some platforms may incorrectly categorize workers, so it’s crucial for gig workers to understand the criteria used by the IRS to determine their status. If uncertain, seeking professional advice or consulting IRS guidelines can help ensure proper classification and compliance with tax regulations.
Tax Help for Gig Workers
Navigating the tax responsibilities of gig work requires diligence and proactive financial management. By avoiding these common tax issues, gig workers can ensure a smoother tax-filing process and potentially reduce their overall tax liability. Seeking professional guidance and staying informed about tax laws are crucial steps toward financial success in the gig economy. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Receiving an IRS notice in the mail can be scary, but the situation can be less daunting if you know what to do. First, it’s important to note that not all IRS notices are negative as some are only informational. In any case, taxpayers should know what steps to take upon receiving an IRS notice.
Do Review Your IRS Notice
The IRS will send notices for many reasons, from notifying you of a balance dueto informing you of a delay in processing your return. From inquiring whether your return is missing a schedule or form required for processing to informing you of a potential audit. Carefully review your notice for important information. If you’re unsure of what the notice means, you can look up the CP or LTR number, located on the top or bottom right-hand corner of the notice.
It also shows the date and time the IRS expects you to respond. In the best case scenario, the IRS is pursuing a correspondence audit covering one or two items of a single year’s tax return. Correspondence audits are conducted entirely by mail and makeup 75 to 80 percent of all audits. An in-person interview audit takes place at your local IRS office. A field audit is scheduled for a particular date and time but takes place in your home or office. It is considered the most comprehensive type of audit.
Do Not Panic
Understand what auditors are seeking. While each audit is different, all audits focus on three basic questions:
Is your business truly a business – or just a hobby?
If you can answer these three questions to the satisfaction of the auditor, you stand a good chance of emerging from an audit relatively unscathed.
Do Gather Your Documentation
Once you have determined what information the IRS is seeking, it’s time to begin gathering your paperwork. If the IRS is challenging a particular deduction or tax credit that you claimed, gather whatever documentation you have to support your claim. This can include bank statements, receipts, and invoices. Provide as much information as possible concerning the inquiries the IRS has made. Also, make photocopies of everything that you intend to provide to the IRS. Never give up your original documents. If you must report in person for an office audit or prepare your home or office for a field audit, ensure that your paperwork – and your representative – will be available and ready.
Do Respondto the IRS Noticein a Timely Manner
If the information on the notice looks inaccurate, you should respond with a written dispute. Doing so in a timely manner can help minimize interest and penalty fees. Be sure to include any information and supplemental documentation to support your case. However, do not volunteer information the IRS has not specifically requested. Typically, the IRS should respond to disputes within 30 days.
Do Check for Scams
Remember that the IRS will never contact you via text message or social media. In fact, initial contact from the IRS is usually via mail. If the IRS notice does not appear credible, you can always check your online tax account on the IRS website to confirm balances due, communication preferences, and more.
The IRS will notify a taxpayer if they believe that there may be fraudulent activityoccurring on their tax return. The IRS will send a letter to you inquiring about a suspicious tax return that you may have not filed. They will request that you do not e-file your return because of the duplicate social security number that was used. Act quickly should you receive this letter from the IRS to avoid further fraudulent activity with your personal information.
Do Not Ignore the IRS Notice
Some IRS notices are purely informational and require no additional action. However, do not assume this is always the case and ignore the notice. Simple mistakes made on your return or underreporting income can result in the IRS requesting action from you. A notice can also be a notification that you owe taxes and will give instructions on how to pay the balance by the due date.
Do Not Replyto the IRS NoticeUnless Instructed To Do So
Typically, a response to an IRS notice is not needed. Once you confirm a response is not required, you can proceed with other actions. Even if the notice informs you of a balance due, there is no need to contact the IRS unless you do not agree with the information on the notice.
Do Learn from the Experience
Use the situation as an opportunity to learn more about tax regulations and ensure that your future tax filings are accurate and complete. Consider consulting with a tax professional for ongoing guidance.
Tax Help for Those Who Received an IRS Notice
Even if you prepare your own returns, having a professional from Optima Tax Relief check out your response before you return it to the IRS may save you from making a costly error. The IRS allows you to be accompanied by a representative if you have been contacted for an in-person interview audit or a field audit. Take advantage of this opportunity. You’ll likely be nervous during the procedure and may share information that might prompt the IRS agent to probe beyond the original scope of inquiry. Not only that, most IRS agents prefer dealing with a professional.
The best thing to do to avoid receiving warnings from the IRS is to always ensure that you remain compliant with tax law. However, if you find yourself in a situation where you owe the IRS, tax relief is always an option. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses IRS online accounts, including why it’s beneficial for taxpayers to have them.
Having an IRS online account can offer several benefits to individuals and businesses. Here are some of the advantages of creating and using an IRS online account:
Convenience: Online accounts provide easy and convenient access to a wide range of IRS services, including filing tax returns, checking the status of tax refunds, making payments, and managing your tax information. You can access these services from the comfort of your own home or office, eliminating the need to call the IRS.
24/7 Accessibility: You can access your IRS online account at any time, day or night. This is particularly useful for people with busy schedules, those who prefer to handle their taxes outside of regular business hours, or individuals in different time zones.
Electronic Payment Options: You can make tax payments, such as estimated tax payments, electronically through your online account, including the option to pay by credit or debit card.
Online Account Management: Your online account allows you to update your personal information, such as your address or direct deposit details. It also provides access to your tax transcripts and IRS notices.
Tax Alerts and Notifications: The IRS can send important notifications and alerts through your online account, helping you stay informed about tax deadlines, changes in your tax status, or issues that require your attention.
Creating an IRS online account can help make your experience with taxes and the IRS much easier.
Tune in next Friday for another episode of “Ask Phil.” Next week’s topic: gift taxes!
When dealing with the IRS, it’s easy to feel outnumbered and helpless. However, it is important to know that you have fundamental rights when it comes to tax issues. The Taxpayer Bill of Rights, which was created to guarantee justice, openness, and accountability in the tax system, outlines these rights. So, here we’ll examine each of your rights listed in the Taxpayer Bill of Rights.
The Right to Be Informed
You have a right to information about the laws that are relevant to you and your tax obligations. The procedure for filing taxes, possible credits and deductions, and any changes to tax laws that may have an impact on you must all be explained in detail by the IRS. Additionally, you have the right to request written explanations for any IRS actions related to your tax accounts as well as the chance to contest or appeal them.
The Right to Quality Service
The IRS is required by law to provide you with timely, courteous, and expert help. This includes the right to communicate with an informed IRS representative, have your inquiries correctly addressed, and have your issues promptly taken care of. You have the right to be spoken to in a way that is easy to understand. On the other hand, you have the right to file a complaint if you feel that the service was insufficient.
The Right to Pay No More than the Correct Amount of Tax
You have the right to pay only the tax debt that is legitimately owed by you. This includes any interest and penalties applied to your tax account.
The Right to Challenge the IRS’s Position and Be Heard
You have the right to object, provide further information, and challenge any judgments the IRS makes. You have the right to expect that the IRS will consider your objections and documentation promptly and fairly.
The Right to Appeal an IRS Decision in an Independent Forum
You have the right to an impartial and fair administrative appeals procedure. Accordingly, this may include the ability to file a lawsuit. The IRS must take into account your arguments and respond in writing with a justification of their choice.
The Right to Finality
You have the right to be aware of the maximum length of time you have to contest the IRS’s claims and to anticipate that once that period of time expires, the IRS won’t pursue further collection efforts. Any deadlines for submitting an appeal or taking other actions must be communicated to you by the IRS as well.
The Right to Privacy
You have the right to anticipate that the IRS will keep your information private and use it solely for legal tax purposes. Except in some limited instances, the IRS is not permitted to disclose your tax information to unapproved people or businesses without your approval.
The Right to Confidentiality
You have the right to assume that the IRS won’t share any information you give them. That is unless you give permission, or it’s required by law. You have the right to anticipate that anybody using or disclosing your return information improperly, including workers, return preparers, and others, will face the appropriate consequences.
The Right to Retain Representation
You have the right to appoint a qualified representative to act on your behalf when interacting with the IRS. This might be an enrolled agent, CPA or tax attorney. Your representative can present your case, advocate on your behalf, and assist in making sure that your rights are upheld.
The Right to a Fair and Just Tax System
You are entitled to a just and equitable tax system that takes into account all pertinent information. This includes the freedom to contest the IRS’s application of the tax laws and to ask the Taxpayer Advocate Service, an impartial division of the IRS that aids people in resolving disputes with the agency, for support.
All in all, the Taxpayer Bill of Rights is a crucial document that gives taxpayers power and guarantees that the IRS will treat them fairly. You can navigate the tax system with confidence and hold the IRS accountable by being aware of and defending your rights. Lastly, consult with a knowledgeable tax expert if you’re having problems or think your rights have been infringed. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
Failing to pay, or even underpaying, your taxes can have drastic consequences that can cost a fortune. This is because on top of your unpaid tax balance is a heap of penalties and interest. One of the most common penalties to watch out for is an accuracy-related penalty. These can include a substantial understatement of income tax penalty and a negligence penalty. While a substantial understatement of income tax penalty usually requires an individual to lie about their income, a negligence penalty can result from being careless or reckless with your tax return. Here’s a breakdown of what the IRS negligence penalty is and how to avoid it.
Negligence or Disregard of the Rules or Regulations Penalty
The IRS may impose the negligence penalty on taxpayers who fail to use reasonable care or who make mistakes on their tax returns. Negligence is the failure to act with the same degree of caution that a reasonably cautious person would in a similar situation. In the context of tax returns, negligence can include the failure to maintain accurate records. It can also include failure to declare all income or to confirm the validity of a tax deduction or credit.
How Negligence is Penalized
The negligence penalty can be up to 20% of the portion of the underpayment of tax resulting from negligence. In addition to this penalty, the IRS also charges interest on the penalty. The current quarterly interest rate for underpayment is 8%.
Tax Negligence vs. Tax Fraud
The difference between the negligence penalty and the IRS’s fraud penalty should be noted. The fraud penalty can be applied to taxpayers who knowingly and purposefully understate their tax liability. It is significantly more severe. Taxpayers who make errors are subject to a less severe penalty known as negligence.
If the IRS determines that a taxpayer has been negligent when preparing their tax return, they will typically send the taxpayer a notice informing them of the penalty. The taxpayer will then have the opportunity to dispute the penalty. They will need to provide additional information or argue that they were not negligent.
The IRS will normally issue the taxpayer a notice advising them of the penalty if they are found to have been careless when preparing their tax return. The taxpayer will then have the chance to contest the penalty by offering more substantiating details or making a case that they weren’t negligent.
Avoiding the IRS Negligence Penalty
It is important for taxpayers to take the necessary steps to ensure that their tax returns are accurate and complete. This involves keeping precise records, disclosing all earnings, and only claiming the deductions and credits that they qualify for. The purpose of the IRS negligence penalty is to motivate taxpayers to take the required precautions to guarantee the accuracy and completeness of their tax returns. Additionally, it ensures sure that taxpayers cannot profit from their errors or carelessness at the expense of other taxpayers. If you’ve been hit with IRS penalties, like the negligence penalty, Optima Tax Relief can help.
