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Practical Tax Advice For Contract Workers

We live in a fast-paced society of internet-connected smartphones and other electronic devices, many of which we believe we couldn’t live without. But, few understand what happens behind the scenes to make our lives run efficiently. For instance, providing meals for a family is as easy as installing an app on your smartphone, answering a few questions, then waiting for your meal from a third-party delivery service. These services cost extra, but most are willing to pay for the convenience of home delivery.

Those who deliver meals and other things we buy online don’t typically work for an hourly wage; their income comes from performing one delivery task at a time. When delivery drivers complete tasks, they receive payments for those tasks that add up to an income. These delivery services, like DoorDash and GrubHub, contract with independent drivers who get paid in full without withholding taxes.

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Unfortunately, the IRS still demands its share of income taxes, even for contract-based delivery drivers. Your best option is hiring a CPA like Peter B. Scala that understands this anc can help you pay your taxes. Additionally, this blog post contains useful information for resolving your tax burden. 

The Gig Economy and Paying Taxes

While recent global events highlighted the need for stay-at-home food preparation, other consumer goods became available for home delivery, strengthening the gig economy. The word “gig” comes from an individual doing one job at a time for income that avoids the usual IRS scrutiny. Be warned! The IRS is adjusting to the gig economy and seeking new ways to collect taxes from workers who run the gig economy.  

What Is a 1099 Contract Worker?

Gig economy workers aren’t getting paid “under the table” to avoid paying taxes. In the eyes of the IRS, these workers are essentially independent contractors. The company that pays you must tell the IRS how much income you get from adding all the completed gigs together in one statement. Businesses must report this income information to the IRS in Form 1099. This document reconnects the IRS to the gig economy in ways still being worked out. For example, how does the IRS define a contract worker? 

The IRS defines a contract worker from the perspective of the money exchanged and who controls what’s done with that exchange. An employer must pay a share of income tax collected from someone’s paycheck in addition to what they pay for the employee. Because the employee and employer both pay taxes on the employee’s earnings, the employer has control of this exchange. With contract work, the liability ends when the employer pays for the services, thus, the contractor controls the exchange. The paid-for services exchanged with contractors are cost savings for businesses. After all, they don’t need to pay the taxes for giving you work. You’ll see more money for services rendered. However, the IRS still wants its share. The IRS has an easy-to-understand explanation detailing what is and isn’t a contract worker. 

The IRS will never pass on an opportunity to amend its rules to make paying and collecting taxes easier. To be an official 1099 contract worker, you must meet the above requirements per their definition. If you’re convinced you’re a contract worker and need to pay taxes, consider hiring PB Scala to help you through the red tape.

Tax Advice For 1099 Workers

The gig economy is growing as more people enter the 1099 contractor workspace. The result is increased attention to tax debt as the switch in tax-paying structures catches many off guard. Not to worry. We’ve put together a list of advice every 1099 contractor should follow.

  • As a 1099 contract worker, you should first understand and then define where you fit in the spectrum of contract workers. As such, this far into the blog, you may already have an understanding that you should be paying taxes. Requirements per the IRS definition of a contract worker are the starting point because the deductions and other business aspects start to matter far beyond the 1040EZ tax return. 
  • The IRS has different rules for filing dates and other critical steps in the tax-paying process. For their tax purposes, contract workers are independent business owners. A contract worker should know these rules as listed on the Self-Employed Individuals Tax Center. You must change your thinking from paying taxes and getting returns, to owing taxes as a consequence of owning a business.
  • Because we live in an electronic-dependent world, some apps can handle basic tax-paying processes for business owners. If you choose this route you might be missing some expensive deductions. Nonetheless, it’s a good idea to save all receipts for anything tied to your work as an independent contractor. Also, have a rough idea of what percentage of your fees must be paid to the IRS. For 2021 it was 15.3% plus an additional .9% for Medicare costs.  

Entering the complicated world of business tax rules isn’t for the average business owner, which is why 1099 contract workers must know who to turn to for tax advice. Peter B Scala has been working with local taxpayers in private and corporate sectors for decades. If you are a contract worker, you will pay your own taxes or risk an audit and potential financial ruin. Contact Peter B Scala, CPA today.

Closing Thoughts

The gig economy took off in 2007 as the Great Recession changed how we look at using money and credit. Simultaneously, and on a grander scale, smartphone technology made direct order deliveries possible. The pandemic showed us the importance of having an army of delivery drivers on call, ready to bring us whatever we needed.

Even when cut from the exchange of money process, the IRS has the credibility and the power to collect taxes from independent contractors. A few independent contractors’ incomes will likely escape the IRS, but not an army of them. The best advice for the future: stay ahead of the IRS and start saving around 16% of your income; for every dollar you make, understand that you must pay 16 cents to the IRS.

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