money Expert: Gig workers face 'a huge tripping point' when it comes to taxes
With some people turning towards freelance side-hustles for the first time in the pandemic, many may be surprised by the challenges they may face when filing their taxes for the first time.
There's a different filing schedule, self-employment tax, and particular forms needed to complete their returns, according to Caroline Bruckner, Managing Director of Kogod Tax Policy Center and American University Kogod School of Business. They also must pay taxes on unemployment benefits if they received them last year.
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"If you are going to owe more than $1,000 of taxes over the course of a year, you should have been paying quarterly estimated payments," Bruckner told Yahoo Finance Live (video above). "That is a huge tripping point for many freelancers the first year they file."
Employers typically withhold taxes from their employees' paychecks, but freelancers don't have withholdings from the payments they get. Instead, they need to make advance quarterly tax payments to the IRS if they owe more than $1,000 in taxes for the year.
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On top of that, freelancers must be ready to pay a Self-Employment Tax of 15.3% on their net earnings of more than $400 in a given year. For regular employees, their employer pays this amount for Social Security and Medicare tax.
Even if freelancers don't have to file taxes because their income is below $12,400 for single filers and $24,800 for joint filers, they still have to pay that tax. Additionally, even if they have a full-time job and their employer withholds payroll tax from their paychecks, they may still need to pay that tax on their freelance income.
'Walk away actually owing a tax bill'
Another tax surprise tax freelancers may find is on their unemployment benefits. While most freelancers are usually not eligible for Unemployment Insurance (UI), the CARES Act established the Pandemic Unemployment Assistance (PUA) program in the spring that provides benefits to them.
"A lot of gig workers are going to file their taxes having claimed unemployment insurance because they didn't have work, and then walk away actually owing a tax bill," Bruckner said.
You must pay federal income tax on your unemployment benefits, but you may not need to pay the state if you live in one of the nine states that don’t have income taxes, including Florida, Nevada, and Texas.
What can further complicate the process is that many gig workers don't receive a Form 1099-K from the platforms they work for unless they make both $20,000 in a given year as well as 200 transactions.
"Very few gig workers make that $20,000, 200-transaction threshold," Bruckner said. "They don't even have records on how much income that they earned."
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
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