According to a recent survey, over a quarter of all Americans are working a job in the gig economy but not declaring it on their taxes. That’s around 69.8 million people and about $214.6 billion in tax revenue going undeclared.
Whether you’re a dog walker, an Etsy artist or a rideshare driver, you can earn some real money in the gig economy. These jobs are typically done on a freelance or independent contractor basis. Sometimes there is no direct employer. Other times, a portion of the money earned comes from cash tips. In such cases there is less of a paper trail, so it’s tempting to treat the job as an “under the table” transaction.
Unfortunately, the IRS may be able to follow the paper trail anyway. The agency doesn’t announce the factors that trigger audits, but it’s hard to believe it’s unaware of the issue. If the IRS compares your paperwork with Uber’s, you may be at high risk for an audit.
There’s also a whistleblower program that allows confidential informants to get a portion of whatever taxes the IRS collects based on the tip. One bad relationship or jealous coworker and you could be caught.
Why should you declare the income from your side gig?
The first and most serious reason is that knowingly failing to declare your income can be charged as tax evasion. That’s a felony that could get you five years in prison per instance.
Those instances — and the tax bill — add up fast. You need to file quarterly on any regular part of your income that comes from self-employment, which includes independent contractor gigs. You should be paying the self-employment tax on your net earnings and making quarterly estimated tax payments. Furthermore, the penalty for failing to report income is 20 percent in cases of willful tax evasion.
Another good reason to report your side income is that it counts toward your Social Security account. The amount of money you receive when you retire (or if you become disabled) is calculated on your top earning years. You’ll get more money in Social Security if your side gig income is used as part of that calculation.
Who is most likely to be holding back on their side hustle income?
According to finder.com, which conducted the survey in July 2017, the group most likely to side-hustle without declaring it on their taxes is millennials. A third of that generation is doing so, estimates finder.com. That’s followed by Generation X, with 26 percent, and then baby boomers at 16.6 percent.
The IRS knows that, too.