Experts Walk You Through the Potential Tax Pitfalls of Seasonal Holiday Side Gigs
Stores, shipping services and even manufacturers are seeking seasonal help this year more urgently than ever. One report found that retailers are looking to bring on 700,000 workers, which is fewer than last year’s 736,300. However, due to unusually high quit rates, there are more than 1 million retail positions open — and retailers are providing incentives like never before to entice people to work the hectic holiday season.
Learn: How To Snag That Seasonal Job — and Make It Permanent
Explore: Looking for a Seasonal Side Gig? These 16 Places Are Hiring Right Now
Walmart plans to hire more than 150,000 workers across their supply chain this holiday season, department store Kohl’s is looking for 90,000 workers, Dick’s Sporting Goods plans to hire 10,000 seasonal workers and craft store Michael’s is in the process of bringing on 20,000 new workers, according to The Business Journals. Meanwhile, UPS is staffing up with 100,000 seasonal jobs, and the U.S. Postal Service seeks to mitigate shipping delays with 40,000 seasonal employees.
Tax Savings for Seasonal W-2 Employees
Most of the positions with major retailers and other organizations will be for W-2 employees, which means your employer will take out withholding taxes the same as they would for a full-time, permanent position. This can help minimize tax headaches come April if your income for the year turns out higher than usual or higher than you even expected. However, if you believe your tax status may change due to the additional income, disqualifying you for benefits such as the advance child tax credit, experts say you’ll want to take action now.
“If your income is set to rise to a level where the 2021 monthly child tax credits limits are in conflict with your income, you may need to take action,” advised Charles H. Thomas II, Certified Financial Planner for Intrepid Eagle Finance. “The IRS offers an online portal to adjust your payment amounts. Declining the remaining payments for the rest of the year could be a way to avoid owing the IRS at tax time.” (Note: The opt-out date for the child tax credit is Nov. 4.)
You might also adjust your withholding taxes to take out more from your paycheck if you are concerned about owing money in April. However, a better choice might be to put extra money aside into a high-yield online savings account.
Dana Ronald, President of the Tax Crisis Institute, recommends filing your taxes as early as possible — as soon as you have the necessary paperwork in hand — so you’ll have time to save up money in case your tax bill is higher than expected. “They may also want to look into ways of reducing their taxable income so that their final tax bill is not as high as it could be,” he said.
Related: 9 Unexpected Companies Hiring Remote Workers Right Now
Ronald suggested a few ways to do this: “One option is to put in some additional hours at work so that you exceed the threshold and transition into a new bracket,” he elaborated. “Another method is to work with an accountant and help them establish a plan for your taxes to maximize deductions when possible. Some tax deductions for seasonal workers may include the cost of employer sponsored-insurance, smaller tax bills on itemized deductions and taxation of some Social Security benefits.”
Tax Considerations for 1099 Contractors This Holiday Season
Gig workers, otherwise known as 1099 contractors, who do not have payroll taxes deducted by their employer, will have a few more considerations come tax time.
“If you are a 1099 contractor, you should understand that you are responsible for taxes on your contract income,” Ronald said. “The IRS states that all 1099 contractors are responsible for paying taxes on their own. This means that they are accountable for figuring out the tax bracket they are in, paying taxes based on that and then filing taxes with the government to report their income.”
With that in mind, contractors may wish to find ways to reduce their taxable income through eligible deductions.
More: Walmart and 6 More Companies Giving Workers a Raise in 2021
“If you’re paid via 1099, you may be able to reduce taxes and save money for retirement at the same time,” Thomas said. “Several types of retirement options are appropriate for contractors or self-employed Americans. Starting something like a SEP-IRA could be a way to save for the future while reducing taxes in the here and now.”
Should You File Taxes as a Contractor?
Some independent contractors may not need to file a tax return for their side gig income, especially if they’ve only worked a short time as a contractor, experts said.
“For individuals with seasonal work and those active in a gig economy, it is important to review earnings and eligible deductions to determine if filing a tax return is even necessary, said Adam P. Scherer, CFP, MS, IRS Enrolled Agent and founder of Greenbeat Financial. “In 2021, the threshold at which self-employed individuals must file a tax return is $400 of net income (i.e., income after deductions are applied),” he continued.
However, taxpayers who qualify for a tax refund or wish to claim refundable tax credits such as the Earned Income Credit, American Opportunity Tax Credit, or CTC, will want to file a return in order to receive that money, Scherer pointed out.
To show the difference in your net vs. gross income, Scherer said, documentation is crucial. “One of the benefits of self-employment is the ability to deduct expenses that are deemed ‘ordinary and necessary’ to fulfilling your job duties.”
See: How To Use Your IRA as a Last-Minute Tax Deduction
Find: 22 Side Gigs That Can Make You Richer Than a Full-Time Job
Some of these deductions include mileage related to work, vehicle excise tax (if applicable in your state), the costs of office equipment, education and training for the job and marketing or advertising costs related to your small business or side gig.
“These deductions, if properly documented, can result in significant tax savings,” Scherer concluded.
More From GOBankingRates
Last updated: October 22, 2021
This article originally appeared on GOBankingRates.com: Experts Walk You Through the Potential Tax Pitfalls of Seasonal Holiday Side Gigs
