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Federal Tax Obligations of Gig Workers | Legal Thoughts

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published July 25, 2021

Federal Tax Obligations of Gig Workers

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Federal Tax Obligations of Gig Workers”. You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, Gladys Marcos – Immigration Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: “Federal Tax Obligations of Gig Workers.”

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “Federal Tax Obligations of Gig Workers.”

Let’s jump right in,

Question 1: What is gig work and who classifies as a gig worker?

Attorney Answer – Question 1:

Hello Alexis.

The IRS defines gig work as “any activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.” Since the COVID-19 pandemic, we’ve seen an increase in gig workers.

Gig work includes jobs like:

  1. Driving for ride-sharing apps or deliveries (for example: Uber, Amazon, DoorDash)
  2. Running errands or completing tasks (for example: Instacart or TaskRabbit)
  3. Selling goods online or renting equipment (for example: Etsy or online shops)
  4. Renting out property or part of it (for example: Airbnb or Turo)
  5. Providing creative or professional services (for example: Upwork or Handy.com)
  6. Any other temporary, on-demand or freelance work

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 2: What do gig workers need to know about their federal tax obligations?

Attorney Answer – Question 2:

First and foremost, Alexis, Gig workers must know that gig work is taxable under the Internal Revenue Code!

Whether it’s a full-time job or just a side hustle, taxpayers must report gig income on their federal tax return. Under the 2021 American Rescue Act, the reporting threshold for gig workers was reduced to $600 with no minimum transaction requirement. That means regardless of how many “jobs” or transactions you do, if you made more than $600, you are required to pay taxes on that income.

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Well, what taxes are gig workers responsible for?

Attorney Answer – Question 3:

This is a very complex question, and requires a nuanced answer since it depends on whether the gig worker is properly classified as an employee or as an independent contractor.

The IRS defines an employee as “anyone who performs work when an employer has the right to control what will be done and how it will be done. Even if the employer gives freedom of action.” This is the most intuitive classification because it is the normal employee/employer relationship we’re used to.

When a gig worker is classified as an employee, their employer withholds required taxes from the employee’s paycheck; such as, Income Taxes, Social security taxes & Medicare. Let me point out that Texas does not have a state income tax. As with typical employee-employer jobs, gig employees who are properly classified as an employee will receive a standard w-2, and includes their gig earnings reported on their W-2 on their annual Form 1040 tax return.

The more difficult or complex situation occurs when a gig worker is properly classified as an independent contractor. The general rule is that a worker is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. For example, independent contractors normally have the freedom to hire others to complete their work.

Unlike employees, independent contractors do not have withholdings taken out of their paychecks before they receive them. This means independent contractors will receive annually a Form 1099 instead of a Form W-2.  Independent Contractors are responsible for paying self-employment taxes. Self-employment taxes consist of the same two parts: Social security & Medicare. Unlike when the worker is an employee and employers pay one-half of these taxes, independent contractors are required to pay the entire amount of these taxes.

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

How will gig workers know if they are employees or independent contractors?

Attorney Answer – Question 4:

It is the employer/business owner who will make this classification because they are ultimately responsible for withholding taxes if the worker is an employee. (If the employer cannot decide, Form SS-4 can be filed with the IRS, and the IRS will make the determination. Form SS-4 can be filed by the employer or the worker. Currently the IRS may take up to 6 months to process Form SS-4).

To determine if a worker is an employee or an independent contractor the employer will examine the relationship between the worker and the business.

Employers (or the IRS, if necessary) will need to consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and Relationship of the Parties.

  1. Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.
  2. Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:
    1. The extent to which the worker has unreimbursed business expenses
    2. The extent of the worker’s investment in the facilities or tools used in performing services
    3. The extent to which the worker makes his or her services available to the relevant market
    4. The extent to which the worker can realize a profit or incur a loss, and
    5. How the business pays the worker
  3. Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:
    1. Written contracts or oral agreements describing the relationship the parties intended to create
    2. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
    3. The permanency of the relationship, and
    4. The extent to which services performed by the worker are a key aspect of the regular business of the company

Employers will need to consider the entire relationship with the worker when determining whether to classify the worker as an employee or independent contractor. Proper classification of workers is governed by federal and state labor laws and misclassification of workers can carry huge federal and state consequences.

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Okay, so let’s say a gig worker is classified as an independent contractor and is responsible for the self-employment tax you referenced.

QUESTION 5:
What does this mean?

Attorney Answer – Question 5:

If a gig worker is classified as an independent contractor, they are responsible for self-employment taxes.  The United States tax system is a pay-as-you-go system, which means that gig workers classified as independent contractors who earned over $600 during the tax period are required to pay quarterly estimated tax payments.

The general rule is that everyone is required to pay federal taxes as they earn/receive income. Again, a pay-as-you-go system. Estimated tax payments are required when earned income is not subject to automatic withholdings (as with employees) and taxpayers expect to have tax liability at the end of the year.

Estimated taxes are calculated at the beginning of the year and are paid on a quarterly basis, typically due on April 15, June 15, and September 15 of the tax year, and the final payment is made on January 15 of the following year. Failure to pay estimated tax could result in a tax penalty assessment by the IRS.

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Attorney, thank you for such clear and thorough answers to my questions this afternoon. We’ve discussed a lot in a very short period of time, so let me wrap up my questions regarding the gig worker and federal income taxes with this one final question.

QUESTION 6:
What are the big takeaways for gig workers?

Attorney Answer – Question 6:

Thank you, Alexis for your excellent questions on this very important tax topic, because you are right, the gig economy took off during the pandemic.  Let me summarize like this—

  1. The main takeaway is that gig work is taxable!
  2. The next big takeaway is that gig workers tax reporting responsibilities are based on how their company/employer classifies them… either as an employee or as an independent contractor:
    1. If a gig worker is classified as an employee, taxes will be withheld from their paycheck, and they will receive a standard Form W-2.
    2. If a gig worker is classified as an independent contractor, no taxes are withheld, and they are responsible for paying self-employment taxes for earnings over $600.
  3. Finally, the last major takeaway is that if a gig worker is an independent contractor and is responsible for self-employment taxes, they may also be required to make quarterly estimated income tax payments directly to the IRS. I cannot overemphasize the importance of keeping up with estimated tax payments if required.

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain how U.S. law:

  1. Defines what the term, “gig workers” even means,
  2. Splits gig workers into two broad classifications as either employees or independent contractors, and
  3. How U.S. tax law imposes varying federal tax obligations and responsibilities upon gig workers depending upon how they are classified by their employers – as either employees or independent contractors.

It seems like the overall idea here is that gig workers need to be aware of how their employers are classifying them, especially if they are independent contractors. And a general takeaway here is that surprises are not good where federal tax obligations and responsibilities are concerned.

To our listeners who want to hear more podcast like this one please subscribes to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone!  And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “Federal Tax Obligations of the Gig Worker.”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

Thinking About Taxes

By:  Coleman Jackson, Attorney & Certified Public Accountant
March 07, 2020

Thinking About Taxes

Thinking about spending that money withheld from employees’ wages to take a tour of the world, pay other business expenses or house payments?  Don’t do it before reading Internal Revenue Code Section 7702!   Hear those alarm bells ringing!  Anyone required to collect, account for, and turn over to the United States Treasury and willfully fails to carry out this duty are subject to severe civil penalties and upon being found guilty of the felony of failing to collect, account for, and turn over can be fined up to $10,000 and spend up to five years in federal prison.  Payroll tax fraud is a serious crime that is commonly investigated by the IRS Criminal Investigation (CI) Division.  This unit of the IRS investigates all kinds of violations of the Internal Revenue Code.  CI along with the Financial Crimes Network investigates FBAR violations (these are U.S. persons with foreign bank accounts and other foreign assets who fail to timely and accurately disclose these holding on Form 114), money laundering (these are individuals or entities engaged in some kind of unlawful activity and endeavoring to get dirty money into the normal banking system) and other financial crimes.

 

Thinking about not filing that required income tax, gift tax or other federal tax return or providing fraudulent information the IRS?  Don’t do it before reading Internal Revenue Code Sections 7207 and 7203Hear those whistles blowing!  Anyone who intentionally gives false documents, which includes returns and any other written representation to the Internal Revenue Service and any of its employees knowing that its materially false or fraudulent is subject to civil fines and upon being found guilty of the felony of giving the Service false returns or other documents can be fined up to $10,000 (if individual) and up to $50,000 (if corporation), and spend up to one year in federal prison.  Multiples applies in that cumulative false statements, returns and documents can generate multiplication of the civil fines and additional years to the duration of the prison term.

 

Thinking about paying fewer taxes than is lawfully owed by engaging in creative accounting, leaving that or this item off the return while adding and dreaming about things that never happened? Don’t do it before reading Internal Revenue Code Section 7201Hear those gongs clanging! Anyone who intentionally attempts to evade or defeat any tax imposed under the Internal Revenue Code is subject to civil penalties up to $100,000 (if individual) and up to $500,000 (if corporation), and spend up to five years in federal prison upon conviction.

 

Thinking about taxes?  Stay away from the tumbling … lie.


This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432     

How Do You Get Rid of an IRS Tax Lien?

By:  Coleman Jackson, Attorney, Certified Public Accountant
January 29, 2020

How Do You Get Rid of an IRS Tax Lien

When the Internal Revenue Service sends you a tax bill and you do not pay it, a federal tax lien is created by operation of law whether the IRS files the lien in the public property records in your state or not.  A tax lien is merely an enforceable claim that attaches to your property and right to property.  If the IRS files the lien in the public property records, they must under the law inform you of this action.  This is done by a Notice of Federal Tax Lien.

 

IRS levy property

A federal tax lien does not authorize the IRS is take your property.  For this, the IRS must levy your property.  A levy is a lawful process by which the taxing authority can take your property or right to property without the necessity to obtain a court order. Don’t get confused between a lien (notice of tax debt) and a levy (taking of your property).  Taxpayers have a right to appeal both actions in the Office of Appeals and possibly to the U.S. Tax Court if their challenge is timely.For now, the question in this blog is how do you get rid of an IRS tax lien?

 

Taxpayers can get rid of an IRS tax lien

Taxpayers can get rid of an IRS tax lien!  If the tax debt has paid in full, the taxpayer can get rid of the tax lien by seeking a release of the lien.  This is typically an automatic process; but if it’s not, request a release of the lien.  Taxpayers can seek exemption of certain property from the lien.  This is typically done to facilitate the sale or financing of real property or business property with an attached federal tax lien.  Taxpayers can post a bond and ask that the lien be released.  Taxpayers can get rid of a tax lien by filing a challenge in the Office of Appeals as to procedural issues since the IRS must comply with exacting legal rules with respect to filing federal tax liens.  Perfecting an IRS tax lien like any lien is a matter of state law which varies from state to state.   In Texas property law varies from county to county.  This simply means that the IRS must comply with each counties law when filing liens in the county property records.  There are 254 counties in Texas.  In addition to any procedural issues,taxpayers can also get rid of a federal lien by challenging it on substantive legal grounds.  Finally, taxpayers can get rid of an IRS tax lien if the ten-year collections statute has expired unless the collection statute has been extended or suspended by bankruptcy proceedings or for other reasons.  The release of the tax lien is automatic on the expiry of the ten-year collection statute.  This is merely a summary of how to get rid of a tax lien; in law, there are a lot of twist and turns depending upon all the facts and circumstances.

 

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

REASONABLE CAUSE AND GOOD FAITH – IRS Penalties Can Be Abated, Forgiven or Waived

By Coleman Jackson, Attorney & Certified Public Accountant
June 21, 2018

IRS Penalties Can Be Abated, Forgiven or Waived

The Internal Revenue Code is full of various kinds of penalties that the Internal Revenue Service is authorized to assess and collect from errant, indifferent, negligent, ambivalent, and indecisive or otherwise noncompliant taxpayers who fail to collect or pay their tax bill or attempt to evade the federal tax laws.  Six IRS penalties that seem to be common in recent years are as follows:

Code Sec. 6672 Penalties:  penalties assessed when taxpayers fail to timely collect, turn over withholding taxes or avoid timely payment of tax obligations;

Code Sec. 6701 Penalties:  penalties assessed against tax return preparers, such as enrolled agents, certified public accountants or others working in the tax return preparation services industry who aids and abet taxpayers in filing false or fraudulent tax returns;

Code Sec. 6676 Penalties:  penalties assessed against taxpayers and others who file tax refund claims or take tax credits without basis in reality, truth or facts.  Unsubstantiated deductions and credits on a tax return commonly give rise to Code Sec. 6676 penalties.   Filing a tax return with the IRS with a false refund request constitutes a false statement under the penalty of perjury.

IRS Penalties

Code Sec. 6697-6699 Penalties:  penalties for failure to file various types of tax returns that should be filed.  Such as failure to file a Form 1040, Form 1120, Form 1120S or Form 1165 can all be the basis for the IRS to assess a failure to file penalty.  Pass through entities, such as, partnerships and s-corporations must still file entity tax returns even though federal taxes are paid at the individual ownership level rather than the entity level.

Code Sec. 6712 Penalties:  penalties assessed against taxpayers who fail to disclose treaty based tax positions.  Immigrants, expatriates and foreigners are especially susceptible to incurring faulty tax treaty position penalties unless they hire well qualified tax consultants in preparation of their annual tax returns.

Code Sec 6662 Penalties:  penalties assessed against taxpayers who fail to report income from foreign sources, such as, foreign bank accounts, foreign businesses, and foreign asset holdings can incur very severe penalties.  U.S. citizens, resident aliens and certain nonresident aliens must report worldwide income from all sources including foreign bank accounts, foreign businesses, foreign trusts and other foreign assets.  Moreover, taxpayers with foreign holdings whose aggregate value exceeds $10,000 at any point during the calendar year must file Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Financial Crimes Network (FinCen’s BSA E-Filing System).  Failure to report the existence of offshore holdings is subject to civil and criminal penalties.  It is anticipated that this set of penalties and potential criminal prosecution will be on the rise in the near future because the IRS has announced that it will end the 2014 Voluntary Disclosure Program on September 28, 2018.

REASONABLE CAUSE AND GOOD FAITH

Another special set of tax rules have long been in force to forgive tax penalties due to reasonable cause and good faith.  The reasonable cause relief is set out in Code Sec. 6664.  The IRS will not impose accuracy related penalties upon a showing by the taxpayer that there was reasonable cause for the tax position and that they acted in good faith with respect to the tax position or act in question.  The reasonable cause defense under Code Sec. 6664 turns on all the facts and circumstances.  That simply means that the IRS and Courts try to determine ‘why’ the taxpayer failed to comply with the federal tax laws.  A taxpayer’s substantial knowledge of federal tax law is a significant factor that the IRS and Courts consider in determining whether a taxpayer acted in good faith and reasonable.  Immigrants or those recently immigrating to the U.S. often lack the sophistication and knowledge of U.S. tax laws.  U.S. tax laws complexity often confounds well educated Americans as well.  Taxpayers reliance on tax return preparers’ suggestions, recommendations and guidance also have been found by many Courts to meet the taxpayers burden to show that they acted reasonable and with good faith.  Taxpayers exercising ordinary business care and diligence sometimes likewise are found by the IRS and Courts as acting in good faith and reasonably.  These various examples simply show that the IRS can abate, forgive or waive federal tax penalties in a very broad spectrum of situations.  Taxpayers confronted with IRS tax penalty situations must act reasonable and be prudent in exploring with their tax attorney the potential that the penalties can be abated, forgiven or waived.  Even fraud penalties can be waived under certain circumstances and criminal charges may likewise be averted.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432