Expert: Gig workers face 'a huge tripping point' when it comes to taxes
With some people turning to freelance sideline jobs for the first time in the pandemic, many may be surprised at the challenges they face when filing their taxes for the first time.
According to Caroline Bruckner, executive director of the Kogod Tax Policy Center and American University's Kogod School of Business, a different enrollment schedule, self-employment tax, and certain forms are required to complete their tax returns. They also have to pay taxes on unemployment benefits if they received it last year.
Read More: How To Use Your Tax Refund In 2021
Scroll to continue with the content
SEAT Ibiza 1.0 ECO TSİ DSG
50,000 TL için, 12 ay,% 0 faiz fırsatı!
"If you owe more than $ 1,000 in taxes over the course of a year, make estimated quarterly payments," Bruckner told Yahoo Finance Live (video above). "That's a big trigger for a lot of freelancers in the first year they submit."
Close up of a Form 1099G Specific State Unemployment Benefit Payments on a W2 form and dollar bill with a stack of 5 dollar bills. Photo: Getty Creative
Employers usually withhold taxes from their employees' paychecks, but freelancers do not have withholding from the payments they receive. Instead, they must make quarterly tax payments to the IRS if they owe more than $ 1,000 in tax for the year.
Read more: Tax Tips for Freelancers 2021: Smart Tax Return Methods
Additionally, freelancers must be willing to pay a 15.3% self-employment tax on their net income of more than $ 400 in any given year. For regular employees, your employer pays this amount for Social Security and Medicare tax.
Even if freelancers are not required to file taxes because their income is less than $ 12,400 for single applicants and less than $ 24,800 for joint applicants, they still have to pay this tax. Even if they have a full-time job and their employer withholds wage tax from their paychecks, they may still have to pay that tax on their professional income.
"Go away because you have a tax bill"
Another tax surprise freelancers may find relates to their unemployment benefits. While most freelancers are usually not eligible for Unemployment Insurance (UI), the CARES law introduced the PUA (Pandemic Unemployment Assistance) program in the spring, which gives them benefits.
"A lot of gig workers will file their taxes after applying for unemployment insurance because they were out of work and then actually go away because of a tax bill," Bruckner said.
You must pay federal income tax on your unemployment benefits, but you may not have to pay the state if you live in any of nine non-income tax states, including Florida, Nevada, and Texas.
What can make the process even more difficult is that many Gig employees won't get a Form 1099-K from the platforms they work for unless they earn both $ 20,000 in a given year and 200 transactions.
"Very few gig workers earn this $ 20,000 and 200 transaction threshold," said Bruckner. "They don't even have a record of how much income they made."
Yahoo Money's sister site, Cashay, has a weekly newsletter.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
Stock market highs, booming real estate, and millions of unemployed: A story of two Americas amid the coronavirus pandemic
House and Senate pass a $ 900 billion stimulus agreement
Read more Cashay personal financial information, news, and tips
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and Reddit.
Hundreds of schoolgirls missing after armed bandits storm Nigerian school in Zamfara
The House Is Expected to Pass Stimulus Today. What Happens Next.
Melissa Gorga Confirms Teresa Bought a 3.3 Million Dollar Home with New Boyfriend
3 Energy Stocks to Buy and Hold for the Long Term
How Michigan basketball solved Iowa star center Luka Garza and the Hawkeyes' offense
Capitals Twitter goes nuts over T.J. Oshie's incredible goal against Penguins