Gone Fishing
Perhaps you’re thinking you’re a small fish and that the IRS would have no interest in the couple thousand dollars you make delivering food, driving people around, or selling ugly sweaters on Etsy. Surely the IRS is so busy going after politicians, movie stars, and mafia hitmen that they won’t notice someone like you. You’re self-employed, after all.
Well, my friend, I hate to be the bearer of bad news, but if that’s what you’re thinking, you’re dead wrong. Not only is the IRS restructuring as we speak to allow for more audits in general, but they’ve also put in place new reporting standards for the large payment companies upon which the gig economy runs. Companies like Paypal, Venmo, and Stripe are now sending 1099’s to everyone who makes more than $600.
If you’re not careful, one day in the not too distant future, an IRS accountant or even an IRS AI program will notice a discrepancy between what Paypal said they paid you and what you reported on your return.
The Tax Man cometh for everyone, eventually.
Changes to Reporting Requirements for Self-Employed
Whether you’re starting a new business or supplementing your income with gig work this year, be advised, the IRS has some rule changes that have gone into effect in 2023. In the past, the limit for reporting was much higher; now the floor has been drastically lowered. If you make more than $400 in the year, you must report it.
What is Self-Employment Tax
Self-employed? Listen up! If you work for yourself as a small business owner or independent contractor, not only do you have more autonomy, no ceiling on your salary, and the ability to go bowling in the middle of the day, but you’re also responsible for paying self-employment tax. The self-employment tax rate is currently 15.3%, which includes 12.4% for social security and 2.9% for Medicare.
The other kicker is, when responsible for paying self-employment taxes, you must pay them quarterly rather than in a lump sum on April 15th of every year. If you don’t give “big brother” his quarterly dues, you will be eligible for penalties and interest payments.
What this means if you’re self-employed
If you’re self-employed and you anticipate earning more than $400 on the side, you will need to begin paying these estimated self-employment taxes immediately. That’s right, you gotta pay the tax man before you’re even sure whether you’ll make a profit!
A general rule of thumb is to pay a third of your estimated income in these quarterly payments.
How to Get Started
We all know that the IRS changes as the wind blows, so be sure to go to irs.gov and check if there are any updated requirements since the writing of this blog. And if they haven’t already changed the link or the name of the form, you can take a gander at the 1040-ES right here.
Remember, there are many, many benefits to working for yourself, so don’t let this discourage you. Taxes come for everyone; it’s simply a cost of doing business. And if you have any other questions about the cost of doing business I can clear up for you, contact me anytime!
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