So if the amount of unemployment you were eligible for was not sufficient, you might have turned to gig work! Maybe you gave voice lessons or personal training online through Zoom, or started driving for Uber, or started selling things on Etsy. And that means you might have earned a lot more than you were expecting outside of a traditional employee job. What might that mean for your taxes this year?
1. You do need to report it. If you were working for a company, you will likely get a 1099-NEC, but a lot of you may have just gotten paid through Venmo or Paypal etc for things like online voice lessons or tutoring or personal training, etc. That money is not free! You do need to report it on your taxes. If you do not, it can get you in big trouble. And if you come to me and say, yeah, my income on paper is so low because I earned 10k from Venmo, but I don't want to report that...then you unfortunately can't be my client. I can be fined for preparing a return that understates income, so it's not something I can help you with!
2. You can take deductions on it! You may be used to not doing deductions because you think you need to have a certain amount for it to count, or you thought they repealed deductions. That's true for employees, but not for gig workers and the self-employed! You definitely should be taking deductions to reduce your taxable income, check out my spreadsheets!
3. Be prepared to pay 20% on that money! Normally when you are an employee, you don't worry about taxes, they are handled for you. But when you are on a 1099 or self-employed, you get to be the one to handle it. You have to pay both the income taxes (federal and state) and the self-employment taxes. Self-employment taxes are usually the biggest shocker. These are the taxes that pay for Social Security and Medicare, and they are about 15%. When you are an employee, they just come out of your check automatically (and half is paid by your employer and isn't even on your paystub!) and they aren't even on your tax return. But when you are self-employed, you pay them on your taxes on top of income tax. That's why you can wind up paying what seems like a very high percentage, even if you didn't earn that much money. You can be only paying 3% in federal income tax, 2% in state, but then 15% in self-employment, and that's how we wind up with 20%.
4. Don't get into a vicious cycle of tax debt! If you didn't know you needed to be setting aside so much, this tax season might be a nasty shock, but you will climb out of it. Pay the taxes in full if you can, or set up a payment plan with the IRS and the state. The interest on payment plans is WAAAAAAAY lower than that of credit cards, so it's a much better deal to do a payment plan than put them on a credit card. And start dealing with 2021 now and going forward. Make estimated payments on your 1099 and self-employment income (how to videos on that coming soon!) so that this doesn't happen again. Also, you might be penalized for underpayment if you owe too much when you pay your taxes, which is another good reason to get going on estimated payments.
1. You do need to report it. If you were working for a company, you will likely get a 1099-NEC, but a lot of you may have just gotten paid through Venmo or Paypal etc for things like online voice lessons or tutoring or personal training, etc. That money is not free! You do need to report it on your taxes. If you do not, it can get you in big trouble. And if you come to me and say, yeah, my income on paper is so low because I earned 10k from Venmo, but I don't want to report that...then you unfortunately can't be my client. I can be fined for preparing a return that understates income, so it's not something I can help you with!
2. You can take deductions on it! You may be used to not doing deductions because you think you need to have a certain amount for it to count, or you thought they repealed deductions. That's true for employees, but not for gig workers and the self-employed! You definitely should be taking deductions to reduce your taxable income, check out my spreadsheets!
3. Be prepared to pay 20% on that money! Normally when you are an employee, you don't worry about taxes, they are handled for you. But when you are on a 1099 or self-employed, you get to be the one to handle it. You have to pay both the income taxes (federal and state) and the self-employment taxes. Self-employment taxes are usually the biggest shocker. These are the taxes that pay for Social Security and Medicare, and they are about 15%. When you are an employee, they just come out of your check automatically (and half is paid by your employer and isn't even on your paystub!) and they aren't even on your tax return. But when you are self-employed, you pay them on your taxes on top of income tax. That's why you can wind up paying what seems like a very high percentage, even if you didn't earn that much money. You can be only paying 3% in federal income tax, 2% in state, but then 15% in self-employment, and that's how we wind up with 20%.
4. Don't get into a vicious cycle of tax debt! If you didn't know you needed to be setting aside so much, this tax season might be a nasty shock, but you will climb out of it. Pay the taxes in full if you can, or set up a payment plan with the IRS and the state. The interest on payment plans is WAAAAAAAY lower than that of credit cards, so it's a much better deal to do a payment plan than put them on a credit card. And start dealing with 2021 now and going forward. Make estimated payments on your 1099 and self-employment income (how to videos on that coming soon!) so that this doesn't happen again. Also, you might be penalized for underpayment if you owe too much when you pay your taxes, which is another good reason to get going on estimated payments.
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