Have a side hustle? You might be breaking the law. The IRS requires anyone making more than 400 bucks a year from self-employment to report that income on their tax return. That means if you sell textbooks on Amazon, play gigs on Friday nights, or pocket the tips from a Saturday bartending shift you picked up for your buddy without reporting it on your taxes, you might be committing tax evasion.
The bulk of the loopholes and deductions which were supposed to be streamlined or removed entirely from our tax code aren’t. If you do follow the law and report your self-employment income, you first need to file for a tax identification number, then pay the IRS every quarter based on how much you think you’ll make that year. Watch out. Since you’re working for yourself, you owe the IRS both employer and employee portions of Medicare and FICA taxes – self-employment taxes are about 15 percent of your income, or roughly double the Medicare and FICA tax which would normally be taken out of your check working an hourly job at a coffee shop.
Let’s say you step up your game and start driving for Uber over the summer or work a table on campus selling study materials for graduate school admissions tests. Forgot to recalculate your quarterly tax payment? Congratulations, you played yourself. When you file your taxes in April, you’ll owe the IRS both penalties and interest on any income you didn’t pay enough taxes on the previous year.
Ostensibly the tax reform agenda proposed by the White House (most recently in form of the Tax Cuts & Jobs Act released by Congress) is supposed to simplify the tax code. The legislation proposes a near doubling of the personal tax deduction, which is certainly a big positive for young adults just starting out – that means you’d pay almost no federal tax on the first $12,000 you make every year. But we were promised the average American citizen could file their taxes on a postcard, not just get a bigger deduction.
As tax reform makes its way through Congress, the bulk of the loopholes and deductions which were supposed to be streamlined or removed entirely from our tax code aren’t. And those are the very things that make it so complicated to file your taxes, especially for young people reliant on self-employment income.
Our tax system hasn’t undergone a major overhaul since 1986, thirty-one years ago.
Of course, there’s a sensible way to handle your taxes if you’re self-employed – you can hire a professional tax service to handle your taxes. Unfortunately, since you want your taxes to accurately reflect the money you spend running your business, on expenses like paying for gas and oil changes for your ride-sharing car or advertising your crafts on Etsy, you’ll be filing a complex tax return with itemized deductions, costing hundreds of dollars more in service fees than a professional tax services charges for a simple personal income tax return.
Sound absurd? You bet it is! Here’s the heart of the problem: our tax system hasn’t undergone a major overhaul since 1986, thirty-one years ago. In the mid-eighties, gas cost about $0.89 a gallon and late Star Wars actress Carrie Fisher was Taylor Swift’s age. Our tax code was written for an era when summoning a car with a handheld communication device was the stuff of Star Trek episodes.
Our tax code wasn’t written for an era with scores of young adults struggling to get established in careers and who made ends meet with freelance gigs, internship stipends, and 1099 contracts. And it would appear tax reform is going to leave us in the 1980s.