Merry May 4th. Yes, this is another goofy, made-up holiday, but one that's dear to sci-fi fans (and punsters), particularly those devoted to Star Wars.
The film franchise's iconic "May the force be with you" greeting is celebrated each year on the similar sounding "May the Fourth be with you."
As a long-time sci-fi fan and a college student who waited in a long line to see the 1977 debut of Luke Skywalker, Princess Leia, Han Solo and Chewbacca, I have already used this greeting several times today.
And as a tax geek, too, May 4th also is the perfect day to make sure the tax force is used for good, especially when it comes to dispelling four potentially costly tax myths.
1. I didn't get an earnings statement, so the money is tax-free.
Every side-hustle out there wishes. But, no, that’s a big, fat and costly myth.
Confusion here comes from an Internal Revenue Code reporting requirement for folks who hire independent contractors. Only earnings of $600 or more for each freelance job must be reported to the worker and the Internal Revenue Service.
But even if you made much less than that 1099-MISC trigger because you only were a Lyft or Uber driver for a couple of days a month, you still owe tax on the money, regardless of how little.
In some cases, your tax responsibility regarding this money includes not just income tax, but also self-employment tax.
Remember, too, that you owe income tax on other money, such as investment earnings, prizes or gambling winnings, that isn't subject to withholding. Again, regardless of how large or little the amount.
How will the IRS know about this money if it, like you, didn't get a statement? To borrow a from our current president, believe me, it has it ways. Do you really want to test the tax agency's investigative and audit skills?
There is, however, some good tax news. You may be able to deduct expenses related to your side job.
2. I can pay all of my estimated taxes at once.
OK, you didn't fall for tax myth #1. You know you have to report all your earnings, including that side job money you use to supplement your wages.
You also know you must pay estimated taxes to cover these earnings if you expect to owe $1,000 or more in taxes when you file your return.
But you have fallen for the myth that you can settle up with the IRS on those self-employment earnings by paying your estimated tax amount in one lump sum when you do file your 1040.
Wrong.
The U.S. tax system is pay as you earn for everybody. When you get a salary, your taxes are taken out via payroll withholding and reflected on your annual W-2.
However, when you are self-employed, either full-time or via side hustles to supplement your wages, you generally need to make quarterly estimated payments. These four extra tax payments are the pay-as-you-earn equivalent of payroll withholding.
If you are late in making those estimated tax payments, you will likely face late- and under-payment tax penalties, as well as interest on the taxes not paid on time.
If you missed the April estimated payment deadline, file your 1040-ES now. Being a few weeks late is much better than being months behind on estimated taxes.
Then mark your calendar so that you don't miss the June 15, Sept. 15 and Jan. 15, 2018 estimated tax deadlines.
3. I'm married so my spouse and I must file jointly.
Being married does mean that you and your better half do most things together. This usually includes filing taxes on one return every April.
Yes, most married filers, including same-sex wedded couples, do file jointly because it tends to produce a lower tax bill. And some tax breaks aren't available to couples unless they send the IRS one Form 1040.
But filing a joint tax return is not a tax code requirement. The tax code gives filers the option of choosing from five filing statuses. And sometimes one of them, married filing separately, actually works in your favor.
One example of when married filing separately works out better is when one spouse has significantly larger deductions, usually medical costs, than the other.
When you file jointly, your combined income might make it impossible clear the 7.5 percent Schedule A itemized threshold to claim these costs. However, by filing separately, the spouse with the medical costs might be able to claim those and greatly reduce his or her tax obligation.
The key is to run the numbers to make sure the two 1040s is the better filing move. If you use tax software, it can help you make the joint vs. separate filing comparison.
This week's Weekly Tax Tip also looks at other instances when it's wise for a married couple to file separate tax returns.
4. Getting a big tax refund every year is good tax planning.
I'm not here to judge. Everyone's tax and personal finance situation is different. But I still believe that getting a large tax refund every filing season is not good tax or person financial planning.
Yes, I know a planned refund is an easy forced savings account. I also know that most easily accessible savings vehicles nowadays are offering pathetic interest rates. And, yes, I know extra money burns a hole in some folks' pockets; I have relatives who spend every single dollar they get.
But letting Uncle Sam have an interest-free loan of your tax money for more than a year is not the best idea.
You could be using those extra dollars in every paycheck to pay down high-interest credit card balances each month. This will save beau coups bucks that the card issuers are making off you as your payoff drags out over months and years.
You could be using that tax money to pay daily expenses, like utility or grocery bills, without worrying about busting your monthly budget.
You could have cash on hand if an emergency, like your car conking out, happens. That way you don't have to put those costs on that aforementioned credit card.
Getting your withholding correct is even more important now that the Tax Cuts and Jobs Act has made some changes that will affect most taxpayers' ultimate tax bills.
Those changes make it crucial for all workers to do a paycheck checkup and then adjust your withholding so that you're having the amount that most approximates your ultimate tax taken out of your checks.
And if you're worried about spending the extra money that's no longer going to the U.S. Treasury, set up a direct payroll savings account at your bank or credit union. Again, the interest rate may not be that great, but you won't have a chance to spend the money every payday.
More importantly, it will be under your, not the federal government's, control.
Again, May the Tax Force be with you as you work to fulfill your tax obligations without falling for any of these tax myths, on May 4th or any day of the year.
You also might find these items of interest:
- The many versions of IRS Form 1099
- Tax evasion is a side hustle side effect
- Include self-employment taxes in 1040ES calculations
