Are You a Gig Worker Concerned About Not Paying Taxes? Read This!
In the United States, it has been predicted that by 2027, we will have more “giggers” than non-gig workers. What is a gigger or a gig worker? It’s someone who works in the gig economy. In other words, it is someone who is involved in income-earning activities outside of a standard, long-term employer-employee relationship.
From a tax perspective, the IRS considers gig workers to be small business owners. That means they face different tax rules than traditional employees. If you’re unsure about the rules or ignoring your taxes altogether, you are not alone.
The tax situation can be overwhelming for people in the gig economy. To help you out, this guide provides an overview of gig workers. Then, it explains your tax obligations and what to do if you haven’t been filing your tax returns. If you want help right now, contact us today. At The W Tax Group, we specialize in helping people who are behind on filing or paying their taxes.
What Are Gig Workers?
According to a 2020 report from Intuit, 25-30% of the U.S. workforce is contingent. Contingent workers include freelancers, independent contractors, and consultants. These people do not have an employment agreement with the companies who pay them. Instead, their work is contingent on the company’s needs and the worker’s schedule.
More than 80 percent of large corporations plan to substantially increase their use of a flexible workforce in the coming years. Intuit predicts that small businesses will develop their own collaborative networks of contingent workers, minimizing fixed labor costs and expanding the available talent pool.
With opportunities available through companies such as Uber, Airbnb, DoorDash, and others, taxpayers are finding it easier than ever before to work for themselves. Unfortunately, as workers take on these new jobs/assignments, they’re probably not thinking of what the gig economy means for their taxes.
How to File Taxes When You’re a Gig Worker
Gig workers must report all of their earnings on their tax returns. They should file a Schedule C to note both their income and expenses. The difference between their income and expenses is their business profits, and they face tax on this amount.
As self-employed people, gig workers face self-employment tax of 15.3%. Then, they face income tax on top of that amount. The income tax rate varies based on your income. You are not taxed on income up to your standard deduction, and as of 2022, income over that threshold gets taxed at 10 to 37%.
Say you’re driving for Uber, and you earn $10,000. When you file your tax return you’ll owe $1,530 in self-employment tax, and then, depending on the rest of your income, you might have to pay income tax on top of that amount. This can be shocking to people who are used to having their employers withhold tax from their paychecks.
Tax Challenges for Gig Workers
The changes taking place in the United States raise important tax questions for gig workers. Have you filed your federal income tax returns? And have you included a completed Schedule C with your tax return? If you have, are you behind on paying your federal IRS taxes from last year or more? What if you have not filed your federal income tax returns?
If you’re selling products have you filed state sales/use tax returns? If not, you’re not alone. With so many changes taking place, such as the pandemic and the shift to a gig economy, the IRS is quite aware that many people are confused about their taxes or have fallen behind on their reporting and payment obligations.
In fact, more than 35 million taxpayers in the U.S. have either failed to file a tax return or are unable to pay their IRS taxes due. Worse yet, 37% of all taxpayers reported being unable to pay their taxes.
Why Gig Workers Should File Tax Returns
It can be easy to ignore the task of filing and paying your federal taxes to the IRS. You might think that you can get caught up “next year” when things get better. Only, unfortunately, things don’t get better. You skip tax filing again. And maybe again. Over time, you can get locked in this cycle.
Initially, you might think “I’ve gotten away with not paying the IRS so it’s fine.” But eventually, the IRS will catch up with you. While you procrastinate, the penalties and interest will build up to a dollar amount that is way more than what you would have owed if you had filed and paid on time.
The penalty for not filing is 5% of the tax due. This penalty is applied monthly and can get up to 25%. Plus, you incur interest on the unpaid tax.
What Happens If Gig Workers Don’t File Tax Returns?
It is very clear that the IRS is strengthening its enforcement arm to go after delinquent taxpayers. Letters from the IRS will come. You may even receive a notice that IRS has prepared your tax return. This is never ideal because when the IRS prepares your tax return, the agency won’t include your business expenses or valuable credits. You will face a much higher tax liability than you would have if you had filed on your own.
If you let it go too long, the IRS can seize your assets including monies in your bank account. By then, the penalties and interest will be so high that it will feel like an impossible situation to get out of.
What Happens If Gig Workers Don’t Pay Their Taxes?
If you have an unpaid tax liability, the IRS has an arsenal of tools available to collect the funds from you. The IRS has more power than nearly any private collector. Here’s what the agency can do.
- freeze your bank account and clean out your cash.
- Notify your business’s vendors of your tax liability and levy those accounts, which can be professionally embarrassing.
- Take away your car, house, boat, and other big assets.
- Seize retirement funds and garnish part of your Social Security payment.
- Restrict travel by “freezing” the use of your passport.
- Take away your jewelry, including family heirlooms.
- Seize valuable personal property like furs, art, and gun collections.
Worse, if you’re driven to bankruptcy, there’s a chance it might not end there. The rules are complicated, but some of your IRS tax may not be forgiven if you declare bankruptcy.
Complications of Unpaid Tax Liabilities
Just the anxiety alone is not worth getting this far behind on your taxes. You may even be losing sleep over all of these IRS problems. Especially now, everyone needs to keep their stress levels low and their immune systems in tip-top shape to fight the virus.
For some people in high-risk health categories, this added stress could cause a more severe illness. And that’s the last thing you need because, in a worst-case scenario, that can lead to lost wages and hospital bills on top of your IRS tax liability.
Owing the IRS can cause serious problems in your marriage too. There have been plenty of divorces when the two partners disagree on money issues. When IRS taxes and your bad credit are added to the conflict, your marriage can be in real jeopardy.
What to Do If You’re Behind on Filing or Paying IRS Taxes
As a gig worker, you owe it to yourself and your loved ones to begin the journey of coming clean with the IRS. A huge burden will be lifted from your shoulders, and you will feel enormous relief when you take the first step toward getting your IRS issues resolved. But where do you start?
We want to help relieve some of that anxiety and help you solve your IRS problems. To get started, keep reading to take a look at all of the steps and options that you have when you get behind in filing or paying your federal income taxes to the IRS.
Tips for Gig Workers Who Want to Catch Up on IRS Taxes
Here are some quick facts and tips about resolving your taxes owed to the IRS.
1. The IRS wants to work with taxpayers.
The IRS is actually on your side, in a way. Believe it or not, the IRS is typically eager and happy to collect old liabilities. The agency truly wants to work with taxpayers, but there are many, many rules you need to know and a process to follow if you want a positive result.
2. Don’t represent yourself — get an experienced professional to represent you in front of the IRS.
While you can represent yourself in front of the IRS, it might not be the best idea, especially if your tax liability is very high or you’ve ignored the situation for a long time. A tax professional can help you navigate the situation and negotiate with the IRS.
There are only three types of professionals that can represent your case at the IRS:
- Certified Public Accountants (CPA) — But be careful. Not all CPAs are experienced in IRS tax resolution. Many of them focus on other aspects of tax prep and accounting, and tax resolution may not be in their wheelhouse.
- Enrolled Agents (EA) — Again, make sure the EA has experience with IRS tax resolution. You may also want to see if they have experience with your particular concern.
- Licensed attorneys — Once again, while any attorney can represent you, you should make sure that you hire a tax attorney who focuses on tax controversy and tax resolution.
To get a sense of their experience, you may want to ask what percentage of their tax practice focuses on IRS collection issues or how many cases they handle per year.
3. You’ll probably need to get your bookkeeping caught up.
If you’re behind on your taxes, then you are probably behind on your bookkeeping as well. The tax professional you hire is going to need good numbers in order to work with you.
So, a good first step is to catch up on your bookkeeping. If you don’t have your records, a professional can help you reconstruct them to prepare your Schedule C.
Sometimes, tax resolution professionals provide retroactive or catch-up bookkeeping services or services to reconstruct your records. They’ll do the minimum you need in order to get you or your business in compliance.
4. You’ll probably need to organize all of your IRS mail.
Yep, we know you. It’s sitting in a stack somewhere in your home. If you haven’t opened the mail, start opening it up. It’s helpful for tax professionals to know what type of notices you’ve received. In most cases, tax resolution specialists will know the letter by form number, and that will give them an idea of where to start with your case.
If you’re too anxious, we totally understand. For some people, it can simply be too overwhelming to open a letter from the IRS. In that case, when you hire a tax representation professional, you can bring them into the office and that will be the first thing that they can take care of for you.
The IRS, state tax agencies, and local entities will send a letter if one of the following happens:
- You miss a payment deadline for payroll taxes due.
- You miss a deadline for filing payroll tax reports.
- You miss a deadline for filing your personal or business income tax returns.
- You miss a deadline for paying tax due from your personal or business income tax returns.
- You miss a deadline for filing and/or paying sales/use tax due.
- An amount paid is short or over what the IRS or another tax agency calculates as due.
- The agency notices a discrepancy on any of your tax returns and needs an explanation.
- You have been selected for an audit.
- You fail to respond to previous correspondence.
Please note: The IRS will never send you an email about any of the above situations. They always send physical letters. If you receive an email, it’s a scam.
How Gig Workers Can Get Compliant with the IRS
Remember this, you can’t resolve your tax issues until you get into “compliance” with the IRS. So, after you work through the basics, the next step is to get into compliance. Here is what you need to do to get that done.
1. File Your Past Due Returns — But Be Careful.
You should almost always file your past-due tax returns, but there are some exceptions. Filing needs to be done carefully so you don’t trigger any unnecessary tax liabilities. A tax resolution professional can help you figure out the best way forward.
At this point, you just need to file. You don’t have to worry about how you’re going to pay the tax liability. The IRS has all kinds of programs to help taxpayers get caught up. We’ll cover those in the following sections.
2. Pay Your Current Taxes.
While you don’t have to pay all of your old IRS taxes, you do have to make your estimated taxes for the current year. This is part of getting into compliance. You need to be able to show IRS that you can pay your current taxes.
As a gig worker, you should make estimated tax payments throughout the year and especially when you receive a payment from a vendor. Keep in mind that you not only are making estimated income tax payments but also estimated self-employment tax payments.
Note that if you don’t make your estimated tax payments on time, the IRS will assess a penalty for underpayment. For example, if you don’t pay your estimated payments quarterly, the IRS will tack on this penalty when you file your annual tax return that shows a balance due.
Payment Options for Gig Workers with Past-Due IRS Taxes
This is where it gets extremely complicated. Selecting the correct IRS tax resolution option from the ones listed below can mean the difference between many thousands of dollars, not to mention success and failure.
If you still haven’t hired a tax resolution professional, we recommend you do so at this time. You’ll save hours and hours of time trying to learn about all of the rules, forms, and processes involved. Plus, you’ll have the relief of knowing your issue is in good hands with a professional. Here are the options you have for paying off your IRS taxes.
1. Pay the balance in full including penalties and interest.
If you can afford to, just pay off your full tax bill. If you decide to handle it on your own, you’ll save on legal fees, but if you’re a first-time offender, you may be paying penalties and interest that a tax pro could help you get waived.
If the IRS calculated your taxes, they may be overstated. And what if the IRS made a mistake? Or what if you could have gotten the interest waived? These are the issues a tax professional can help you understand and avoid.
2. Get help to correct IRS errors.
If you don’t feel that you owe the taxes that the IRS says you do, there may be a mistake on the IRS’s part. If it’s a recent error, it can be fairly easy to fix. But if the error happened a long time ago, you may need to go through a complex process to prove you don’t owe the amount they say you do.
For this type of IRS problem, it’s best to hire a tax representation professional, especially if it’s related to payroll taxes. The IRS can be extremely aggressive about going after innocent people. If you’re not sure of the rules, it can be scary to talk to an IRS officer directly.
A professional tax representative can get into the IRS files and find out what the agency has on you. They can also review your filed tax returns and check to see what errors they can spot.
Knowledgeable tax professionals know what to do if the IRS officer is pulling any kind of power play on you — it happens. They know the ins and outs of the system, and they work diligently to get you a good resolution to your IRS problems.
3. Apply for innocent spouse relief if applicable.
Did your partner get you into this IRS problem in the first place? Is it really their problem and you just got dragged into it? Did they promise to file and then didn’t? Did they not pay without telling you?
If that’s the case, you might qualify for innocent spouse relief, depending on your circumstances. This type of relief is not easy to obtain, but a tax professional can help you apply. If you qualify, you will only be responsible for the portion of the tax liability related to your income. You will no longer be responsible for your spouse’s tax bill.
4. Ask for penalty abatement.
Some taxpayers might be eligible to get their penalties waived. In some cases, the IRS may agree to waive your penalties just because you’re a first-time offender. In other cases, to get your penalties erased, you may have to prove that you were the victim of a fire, natural disaster, illness, or other qualifying calamities.
5. Set up an IRS installment agreement.
You may qualify to pay off your taxes in monthly installments over several years. Depending on how much you owe and your history of default on previous payment plans, the IRS may require a detailed application form along with documentation about every aspect of your financial life including your assets, debts, income, and expenses.
6. See if you qualify for a streamlined installment payment plan.
If you owe a relatively small amount of money and meet the criteria, you may be lucky enough to get a streamlined installment agreement. In this case, you don’t have to submit as much paperwork, and the approval is automatic. However, not everyone qualifies.
7. Request a partial payment installment agreement.
The partial payment installment agreement (PPIA) is similar to a regular installment agreement where you make monthly payments to the IRS for taxes owed based on what you can afford. However, with this payment plan, you only pay back part of the taxes you owe. When you get to the end of the payment term, the IRS waives the remaining balance.
To apply, you must submit a full financial disclosure along with supporting documentation. That includes details about your income, assets, debts, and expenses. PPIAs can be harder to get than other types of installment plans but easier than an offer-in-compromise, which is explained below.
8. Apply for an offer in compromise.
An offer-in-compromise is when you or your tax representative makes an offer to the IRS to pay off the taxes for less than you owe. If the IRS accepts your offer, some of your tax liability will be waived.
You must pay off the offer in the amount of time stipulated on your application, and then, you have to stay compliant for the next five years. If you don’t, the IRS can remove your offer and demand the full balance.
Only about 33% of all offers are accepted by the IRS. When applying for an offer in compromise, there is a stringent process to follow, and not everyone gets it right. The offer acceptance rate is higher for experienced tax professionals and lower for inexperienced applicants.
9. Understand reasonable collection potential (RCP).
One of the key concepts in getting IRS taxes forgiven is reasonable collection potential or RCP. RCP refers to the amount of money the IRS believes that it can reasonably collect from you. If you want the IRS to waive some or all of your tax liability, you have to convince the agency that your offer represents your RCP.
This can be tricky to do on your own. RCP is a complicated formula based on your financial situation and extenuating factors. Tax resolution professionals work with RCP on a regular basis, and they know what the IRS wants to see. A tax pro can work with you to create a compelling budget and strong argument when you present your offer to the IRS. Their hard work and experience improve your chance of getting your offer or application approved.
10. Claim doubt as to liability.
Doubt as to liability is a form of an offer in compromise. It applies in special circumstances when there is evidence that the tax assessed is not accurate. You can’t claim doubt as to liability just because you disagree with the tax assessment. Instead, you need to base your claim on a very specific argument.
In particular, doubt as to liability may apply if you were not able to be present at an audit, if you were incorrectly assigned a payroll tax liability from an employer, or if you waited too long to correct the tax using other IRS channels.
11. See if you qualify for doubt as to collectability.
Doubt as to collectability is the most popular form of an offer in compromise. This phrase means that you owe the money, but you can’t afford to pay due to your financial situation. In other words, there is doubt that the IRS could collect the whole liability so the IRS agrees to reduce the balance.
For the past two decades, doubt as to collectability has been the subject of many radio and TV commercials claiming how taxpayers can settle their tax liabilities for “pennies on the dollar.” While this is possible, it is not always the case. These companies are notorious for overpromising and misleading taxpayers.
If you apply for an offer in compromise based on doubt as to collectability, the IRS will scrutinize every financial record they can get their hands on. This includes bank account records, house values, credit card history, utility bills, and more. Before agreeing to reduce your taxes, the agency will want to make sure you’re not hiding any income or assets.
An experienced tax resolution specialist can help you determine if you might qualify to use this program and how much you could save. If you don’t qualify, they can help you find other tax resolution options.
12. Buy yourself time by requesting “currently non-collectible” status.
If your financial situation is currently dire, the IRS might stamp your file with a status called currently uncollectible. This happens when the IRS determines that you are unable to make tax payments on prior taxes owed.
When you’re deemed uncollectible, the tax bill still exists and will accrue interest and penalties. Additionally, the IRS may still file a Notice of Federal Tax Lien to secure its position with your assets. But the agency will not take any enforcement action to seize your assets or income streams. The IRS reviews uncollectible statuses every year or two, and if your situation changes, the agency may start trying to collect the bill again.
13. Try for the rare condition of effective tax administration.
Effective tax administration applies in cases where you owe the tax and can afford to pay it, but paying the tax is not in your or the IRS’s best interest. This status is unusually rare and is only approved in unique situations where both the IRS and the taxpayer are considered to be worse off if the tax is collected.
14. Do nothing.
Yes, you can do nothing. However, inaction won’t solve your IRS troubles. In fact, it will make them worse in most cases. The penalties and interest will continue to mount so that you owe even more than you do now.
You might have a lot of excuses for justifying doing nothing, but most excuses are not valid. For example, you might have lost your paperwork. This is not a valid reason to delay action — a tax pro can help you reconstruct your paperwork.
Or, you may be procrastinating because you can’t afford to pay a tax professional. Don’t let money stop you from reaching out for help. A good tax professional can often help you find the money to pay. They will also know how to get you help that you can afford.
15. Hire an experienced tax professional to help you.
Dealing with unfiled taxes or unpaid liabilities can be stressful and confusing. It’s especially overwhelming when you work in the gig economy and you’re trying to build up your business.
With so many requirements, forms, processes, deadlines, qualifications, rules, and exceptions, it just makes good sense to take all of this worry off of your shoulders and leave it to a tax professional experienced in representing taxpayers in front of the IRS.
The difference between choosing the wrong option and the best option can be thousands of dollars and years of additional stress. If you want the most expedient solution, hire a tax resolution expert. They can guide you toward the best outcome for your situation. They can also provide a shield between you and the IRS officers that you would otherwise have to deal with.
How to Find Help for Gig Worker Taxes
You can find an IRS tax resolution professional by surfing the internet. There are many firms offering tax resolution services. Also, don’t forget all those ads on the radio or TV.
But remember, not all tax resolution companies are the same, and sadly, this industry has some businesses who are more concerned about profits than they are about you. To ensure you’re hiring the best professional possible, ask questions when talking to the initial contact person at the tax resolution firm, such as:
- Do you have a tax attorney on staff?
- Are they licensed?
- What is their name and are they willing to talk to you for 5 to 10 minutes?
- What is their level of experience?
- Can you reach this person when you need to speak to them? How will communication be handled if you become their client?
An experienced tax attorney is not inexpensive, but they are an investment. They will know what to do, and they will artfully guide you to the best resolution option for your situation. As indicated above, a quality tax professional can often save you a lot of money in the long run. Remember, however, that you will also need to provide them with the information that they need. They will need your help and cooperation to solve your tax problems.
Gig Workers — Tackle Your IRS Problems Today
If IRS tax problems have plagued you for years, it can be exciting and a huge relief to start to fix these problems. When you’re ready to get caught up, we’re here for you — the sooner, the better. It’s serious business to owe the IRS money — the agency doesn’t fool around. To protect yourself and your assets, you should reach out for help from a tax professional.
The team at The W Tax Group can help you take care of your taxes and relieve that huge psychological burden, so you feel lighter and free from all that stress.
When you contact The W Tax Group, our trained and certified tax professionals work diligently to find the best outcome for your unique tax issues. We handle your situation with the utmost confidentiality and privacy. To get help and tackle your IRS tax problems today, call or email us. We’ll start with a no-obligation confidential conversation about your tax problems and how we can help.
If you or someone you know has an issue with paying their federal taxes and needs help to end their IRS nightmare, please feel free to pass our information on to them. We look forward to helping you.
