Taxes & Retirement Savings in Gig Economy
This month we address tax and retirement savings strategies in the shared economy.
To assist workers in the gig economy the IRS has opened a Sharing Economy Tax Center on its website (https://www.irs.gov/businesses/small-businesses-self-employed/sharing-economy-tax-center ). The IRS is also educating agents on relevant examination techniques.
More of these shared economy activities have come to the attention of the IRS as new Form 1099-K reporting requirements emerge for online and credit card transactions. Use of Form 1099-MISC is still required for large facilitators for service or goods providers. The information-reporting requirements generate a clear audit trail for the IRS if tax return doesn’t match what’s reported by the facilitator.
As a gig worker, you’re generally considered self-employed. You won’t have an employer to withhold taxes from your paycheck. It’ll be necessary to carefully track income and expenses related to the independent contracting activity.
There are apps, such as Quickbooks Self-Employed and Hurdlr, designed to help gig workers track their income and expenses and get a real-time picture of their profits and taxes owed.
For those individuals who are self-employed, they are not planning to see company pensions and gold watches at the end of their time with an employer. For those workers, there are still options for retirement savings.
These saving vehicles include SEP IRA, SIMPLE IRA or Solo-401(k) plans. Selection of these platforms will depend on opting for ease of administration or maximizing the contribution amount.
A Simplified Employee Pension Plan (SEP) is a written plan allowing a small-business owner (and freelancer) to make retirement contributions to traditional IRAs (SEP-IRA) for themselves. Contribution amounts can vary each year (between 0% and 25% of compensation) and the maximum amount in 2018 is $55,000. Generally, the gig worker has until the due date for their annual tax filing to establish the SEP IRA. The SEP IRA doesn’t require plan filings be submitted to the IRS.
A Savings Incentive Match Plan for Employees (SIMPLE IRA) is another option for a small business owner. It is designed for employers with less than 100 employees. There is written documentation required to create the SIMPLE. The contribution amount is $12,500 for those under age 50 and $15,500 for workers over age 50. No plan filings are required by the IRS for this program.
The Solo (or Self-Employed) 401(k) plan is for those workers mentioned in the plan title – self-employed. The maximum contributions in 2018 are $18,500 for under age 50 and $24,500 for those over age 50. Deadlines to establish this type of plan is December 31st or the entity’s fiscal year-end. The plan’s Form 5500 must be submitted to the IRS each year once assets exceed $250,000.
These new labor market opportunities can certainly help people who are transitioning or downshifting in their careers. It is good to know all the requirements and options available to maintain and improve one’s financial foundation.