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The gig economy has expanded rapidly over the past several years. According to Forbes, gig workers made up an estimated 35 percent of the workforce in 2020 and will make up more than half of the Nation’s workforce by 2023.
The majority of gig economy workers are sole proprietors, meaning that they are the sole owners of a business that has not established a separate entity, like an LLC or corporation within their state. In most cases, gig workers receive a 1099 and report their profit and loss from the sharing economy on a Schedule C, but this is not the only tax consideration that gig workers face.
As a sole proprietor, you are responsible for paying both income tax and self-employment (SE) taxes, which make up your Social Security and Medicare contributions. Estimated tax payments are used to pay both income and SE taxes.
What are quarterly estimated taxes?
Taxes are pay-as-you-go. This means that we should pay our taxes as we receive income throughout the year, whether that’s having taxes withheld by the payer, like you would at a traditional employer, or by submitting quarterly estimated tax payments to the IRS.
When you have income that is not subject to withholding by the payer then you probably need to make estimated tax payments.
When and how do I pay quarterly estimated taxes?
The IRS rule of thumb is that if you expect to owe at least $1,000 upon filing your annual tax return, then you should be making quarterly estimated tax payments (QET) throughout the year. Typically, you figure and pay your QET using your prior-year tax return as a guide along with IRS Form 1040-ES.
Determining your estimated tax liability can seem complicated, but your prior-year’s return can be helpful when you’re determining if and how to approach QET payments. Did you owe the IRS in 2020?
If so, look to line 37 on your Form 1040. Divide that number by four to determine your minimum Quarterly Estimated Tax payments for the current year. If you pay 100% of the tax liability shown on your prior year’s return, there is a safe harbor rule; even if your income increases from the previous year, you still won’t be subject to penalties and any overpayments will be refunded to you.
However, if you track your income and expenses using an app like QuickBooks self-employed or Hurdlr, then the software will help you estimate your payments due. Hurdlr provides real-time detailed tax calculations and their “Pro” tier allows you to add your tax professional making it that much easier to stay on track with QET.
You can then make estimated tax payments online, by mail with your 1040-ES attached, or through the Electronic Federal Tax Payment System, a tax payment service that is provided by the U.S. Department of the Treasury.
When are estimated tax payments due?
|January 1 to March 31||April 15|
|April 1 to May 31||June 15|
|June 1 to August 31||September 15|
|September 1 to December 31||January 15 of the following year|
Why should I pay quarterly estimated taxes?
The IRS has seen an increasing number of taxpayers who are subject to estimated tax penalties that apply when someone underpays throughout the year. Making QET payments will help you circumvent a surprise tax bill, avoid interest, and prevent having to pay the Estimated Tax Penalty. This can save you hundreds of dollars each year, if not more.
In some cases, the IRS will waive a taxpayer’s estimated tax penalty. This is determined when you complete IRS Form 2210 to see if you owe a penalty for underpaying your estimated tax and, if you do, to figure the amount of the penalty.
By and large, most gig workers avoid this penalty if they have paid at least 90% of their tax liability for the current year, or 100% of the tax liability shown on their prior-year return, whichever is smaller. So, this is why your prior-year’s return can be helpful when you’re determining if and how to approach QET payments.
It’s never too late to improve upon your tax and business practices as a gig economy worker. We hope that you can use this information to become more proactive with the IRS and your specific situation. This simple shift in your approach could save you thousands of dollars.
Bri Jackson is a QuickBooks ProAdvisor, Tax Consultant, and co-founder of Next Gen Tax & Financial Services. She helps gig economy workers and self-employed individuals with tax strategy and financial planning.
Book a Free Consultation: https://calendly.com/nextgentax/15min