Tax tips for gig workers and independent contractors in Massachusetts
Independent workers and gig workers in Massachusetts need to know how to manage taxes. The wrong form or estimated payment could incur high fees and penalties.
To bring in some extra cash, you may have decided to become a gig worker or independent contractor in Massachusetts. While driving for a rideshare company, delivering groceries or working as a virtual assistant may be a great way to boost your overall financial health, you have to know how to handle your taxes. A simple mistake or lack of information could potentially haunt you for years to come. Before you spend a dime of your extra income, learn how your new venture impacts your taxes.
Make estimated payments
When you start making money from gig or freelance work, do some research to see when you need to make quarterly estimated tax payments. Because you do not have an employer who automatically deducts taxes from your checks, you take on that responsibility yourself. Specifically, you must pay estimated taxes four times a year. Check the IRS site to find out when to make quarterly payments and sit down with an accountant to determine how much those payments need to be.
Divide business and personal expenses and income
All income, except as otherwise excluded under the law, from whatever source derived, must be reported. With both the money you make from your side hustle and the money you spend, keep both separate from your personal income, such as the money earned from a full-time job. What does this look like? As you set money aside for estimated taxes, do not put that money in an emergency fund or a savings account for something like a vacation or a down payment on a house. Blending business and personal finances can seriously muddy the waters during the next tax season, not to mention make your business seem less legitimate to potential and the IRS.
Account for self-employment tax
Besides the estimated payments mentioned above to cover your income tax, you also need to prepare to pay self-employment tax and Medicare tax. Much like FICA taxes deducted from a standard employee paycheck, self-employment taxes cover Medicare and Social Security taxes. When you reach the age of retirement, you are sure to be glad you paid self-employment tax.
Get all the right tax forms
When it is time to file your taxes, you need to have all the right forms. For instance, if you make at least $600 in a single year, you need a 1099-MISC form from every company you worked for. Maybe you handled third-party or payment card transactions. If so, you need to complete form 1099-K, no matter how many transactions you handled or how much you made from those transactions.
Taxpayers in Massachusetts may find themselves in a prickly financial situation with the IRS. Consulting with an experienced tax attorney familiar with the latest tax laws presents a viable option for relief.