Do gig workers need a tax return?
- A sole proprietor or an independent contractor
- A member of a partnership that carries on business
- Someone who owns a business (including a part-time business)
What are estimated payments?Estimated payments are payments that gig workers must make four times a year (each quarter) to cover the estimated taxes on the income they receive. Gig positions are unlike full-time employer positions because they don't have an employer withholding income tax, Social Security and Medicare taxes.
How do you calculate estimated payments?The first thing you'll need is your prior year's annual tax return. You'll need this to help you fill out Form 1040-ES, which is the IRS' estimated tax form that will help you determine your estimated income and deductions. Making estimated payments isn't particularly straightforward if you're uncertain how much money you'll make during the year, if your income fluctuates from quarter to quarter, or if this is your first year being self-employed. All these circumstances will require you to estimate the amount of income you expect to earn for the year. This can be tricky, but don't worry - you can complete another Form 1040-ES to adjust your estimated tax for the next quarter if you realize you estimated your earnings too high or too low.
When are you supposed to pay your estimated taxes?
Four times a year you'll have to pay your estimated taxes and each period has a specific due date. You can pay online with IRS Direct Pay or by mail. If you mail your payment, and it's postmarked on or before the due date, the IRS will generally consider the payment on time. It's important to try to complete your estimated payments correctly because if the IRS determines that you didn't pay enough tax by the deadline of each payment period, you may be charged a penalty.
When it comes time to do your annual return, remember to double-check that you've taken all the right deductions. Hopefully, you've kept meticulous records and tracked all your expenses throughout the year so that you can deduct them from your payments. These include the cost of items such as office space, office supplies and travel expenses.
It may seem like a chore to calculate and pay your estimated tax four times a year, but if you do it right, you'll be thanking yourself when tax season rolls around, and you've already paid your estimated tax liability.
As with any tax matter, be sure to consult a qualified tax professional regarding your specific situation should you need assistance.