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5 Tax Issues Gig Workers Run Into & How to Avoid Them

tax issues gig workers run into

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. 

If You Need Tax Help, Contact Us Today for a Free Consultation 

I Received an IRS Notice: Now What?

i received an irs notice now what

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 due to 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: 

  1. Is your business truly a business – or just a hobby? 
  1. Are your deductions legitimate? 
  1. Did you report all your income? 

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 Respond to the IRS Notice in 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 activity occurring 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 Reply to the IRS Notice Unless 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. 

If You Need Tax Help, Contact Us Today for a Free Consultation 

How Home Equity Loans Affect Taxes

how home equity loans affect taxes

Sometimes the idea of taking out a second mortgage can be a viable solution to eliminating debt, funding home renovations, or paying off unexpected medical bills. Before taking out a home equity loan, you should know the tax implications that come with it.  

What is a home equity loan? 

Also known as a second mortgage, a home equity loan is a type of consumer debt that allows homeowners to borrow against the equity in their residence. The equity that you have accumulated through mortgage payments is used as collateral. The loan is paid out to you in a lump sum and is repaid with interest at a fixed rate each month for a set number of years.  

How much can I borrow with a home equity loan? 

Typically, the max you may borrow is around 80% to 85% of your home’s appraised value less the remaining balance on your mortgage. For example, let’s say your home is valued at $500,000, your mortgage balance is $200,000, and your lender will allow you to borrow up to 80% of your home’s value. 

$500,000 x 80% = $400,000  

$400,000 – $200,000 = $200,000 maximum loan amount 

In this scenario, you may borrow up to $200,000. The principal would be repaid at a fixed rate each month for a set number of years in addition to your regular mortgage payment, hence the term “second mortgage.” 

How Do Home Equity Loans Affect My Taxes? 

Like many other loans, the interest on a home equity loan can be tax deductible, but there are some limitations. If you used funds from the loan to “buy, build, or substantially improve” the home that was used to secure the loan, the interest is tax deductible. Since the passage of the Tax Cuts and Jobs Act of 2017, you may no longer deduct the interest of the loan if it was used for any other purpose. The amount of interest that may be deducted will also depend on your filing status.  

Tax Relief for Homeowners 

Deducting home equity loan interest only makes sense if your itemized deductible expenses are more than the amount of the standard deduction. If you choose to itemize your deductions and would like to deduct home equity loan interest paid, you will need to supply your tax preparer with IRS Form 1098, Mortgage Interest Statement. Tax planning can be incredibly stressful and intimidating, especially when taking new actions such as deducting loan interest. It is always best to check with a trusted tax professional to ensure you remain compliant with the most updated tax laws. If you need tax help, give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.

How Inflation Will Affect Your Taxes in 2023

how inflation will affect your taxes in 2023

Every year, the IRS makes inflation adjustments. With consistently high inflation in 2022, some experts are predicting larger adjustments than normal that can affect tax brackets in 2023.  

What is Inflation? 

Put simply, inflation is the overall increase in prices of goods and services over a given period of time. Inflation is the reason a gallon of milk costs about $4.33 today but only $2.72 in 2002. The increase can come from a rise in demand, like when a tech giant charges increasingly high prices for a new product because of growing popularity. The increase can also result from a decrease in supply, usually because of an increase in cost of production, materials or labor.  

Does Inflation Always Affect Taxes? 

Inflation does always affect taxes. In fact, the IRS automatically adjusts income tax brackets and the standard deduction each year according to inflation rates. Since the 1980s, the U.S. inflation rate has staggered around 2%, which is considered a healthy rate by the Federal Reserve’s standards. In some years when inflation has been relatively higher or lower, the rate has fluctuated between 0% and 4%.  

How is Inflation Affecting Income Tax Brackets in 2023? 

The consistently high inflation in 2022 has resulted in higher-than-expected inflation adjustments for income tax brackets, with most sitting between 6.5% and 8%. This essentially means that taxes will apply to less of your earnings beginning on January 1, 2023, to reflect the newest value of money based on inflation. The most notable changes are as follows: 

  • 12% Tax Bracket: Taxable earnings up to $11,001 for single filers and $22,001 for joint filers 
  • 22% Tax Bracket: Taxable earnings up to $44,726 for single filers and $89,451 for joint filers 
  • 24% Tax Bracket: Taxable earnings up to $95,376 for single filers and $190,751 for joint filers 
  • 32% Tax Bracket: Taxable earnings up to $182,101 for single filers and $364,201 for joint filers 
  • 35% Tax Bracket: Taxable earnings up to $231,251 for single filers and $462,501 for joint filers 
  • 37% Tax Bracket: Taxable earnings up to $578,126 for single filers and $693,751 for joint filers 

How is Inflation Affecting the Standard Deduction in 2023? 

The standard deduction will also increase.  

  • Single Filers: $13,850 
  • Married Individuals Filing Separately: $13,850 
  • Married Couples Filing Jointly: $27,700 
  • Heads of Households: $20,800 

Tips for Taxpayers 

Tax planning can be very complicated and sometimes it’s best to seek help from professionals in the industry. Give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.