College students and taxes: Avoid this common mistake
College students are making the most of the gig economy. The ability to sell stuff on Etsy or E-bay or make some extra cash using their vehicle with Uber or Lyft. Although these side gigs can result in some serious side income, they also can make tax obligations more difficult to navigate. Here are three reasons why: classification, withholding and different tax forms.
#1: Classification. How much tax the taxpayer owes the Internal Revenue Service (IRS) is often impacted by the worker’s classification. On a side note, a worker’s classification can impact a lot of things. Insurance for one, workers’ comp coverage for another. This discussion will focus specifically on the impact for IRS purposes.
In this case, a classification as an employee will generally result in a 7.65 percent payroll tax from the employee and the employer will kick in another 7.65 percent. If designated as a contractor, as is often the case in the gig economy, the worker is responsible for the entire 15.3 percent payment.
#2: Withholding. The next factor involves how the IRS gets its tax payment. In most cases, employers will make withholdings from an employee’s paycheck to cover tax obligations on a regular basis. An independent contractor is expected to cover this on their own, on a regular basis. This can mean the worker is expected to file quarterly taxes with the IRS. If so, take note — the first payment for 2019 is due on Monday, April 15.
Do not worry too much. If you expect to owe less than $1,000 in federal taxes you are generally exempt from the requirement to file quarterly taxes.
#3: Forms. Another notable difference: employees generally get a W-2 from the IRS while contractors get a 1099-MISC. If you do not know whether you are an employee or a contractor, the form you get from the IRS can help you determine your classification.
Those who were contractors but did not meet their tax obligations throughout the year may find themselves facing an unexpectedly large tax bill and potential penalties. An attorney can review your situation and help discuss options for payment.