A paycheck checkup is a good idea for anyone working in the sharing economy, so they can determine whether they will owe taxes at the end of the year. As a planning tool it can be used by anyone, individuals and business owners alike. Many people working in the sharing economy are employees, in which case their employers should be withholding taxes from their wages. Many others are not working as employees, so they need to make sure they pay their taxes either through withholding from other jobs they may have, or through estimated taxes.
Either way, because of the far reaching tax changes taking effect this year, the IRS urges taxpayers, including those in the sharing economy, to perform a paycheck checkup now. The easiest way for most employees to check their withholding is through the Withholding Calculator available on irs.gov. The U.S. tax system operates on a pay as you go basis, so taxes must be paid as income is received rather than at the end of the year. This includes anyone involved in the sharing economy.
The paycheck checkup is a great way to make sure you don’t have a tax bill at the end of the year. People who participate in the sharing economy but do not have an employer, usually need to make estimated quarterly tax payments to cover their tax obligation. In this case Publication 505, Tax Withholding and Estimated Tax, and the worksheet in Form 1040-ES, Estimated Tax for individuals, can help people check their withholding and figure their payments correctly. IRS direct pay is the fastest and easiest way to pay.
In recent years, the IRS has seen the number of taxpayers who paid the estimated tax penalty jump from 7.2 million in 2010 to 10 million in 2015, an increase of nearly 40 percent. Using the paycheck checkup and Publication 505 and following the recommended steps can help avoid the underpayment penalty.