40% More People Are Facing This Tax Penalty. Is the Gig Economy to Blame?

close up of paper bill
Samantha Dunscombe/The Penny Hoarder

Gig workers, solopreneurs and freelancers, here’s one more thing you might be doing wrong.

Sigh.

The IRS has discovered that the number of taxpayers penalized for underpaying their estimated taxes has risen nearly 40% in just five years.

Tax filers either made mistakes calculating their estimated taxes or didn’t pay them at all. In 2015, 10 million tax filers were penalized for one of these reasons.

“Taxpayers with a mixture of wage and nonwage income must either pay tax quarterly or raise their withholding to cover the non-wage income. If total payments don’t meet certain thresholds, then the taxpayer owes a penalty on the underpayment based on interest rates charged by the IRS,” Laura Saunders of The Wall Street Journal explained. “Currently the rate is 4%.”

Why Estimated Tax Penalties Are on the Rise

What’s to blame for this rash of tax penalties? Probably the gig economy, where more people receive nonwage payments that do not have taxes withheld.

It’s a typical first-year freelancer mistake: You allocate every dollar of your earnings toward everything but taxes. Then when you see what you owe once Tax Day rolls around, you sob uncontrollably into TurboTax.

It may be a rite of passage, but it’s one that can come back to haunt you over the course of your self-employed career.
According to a survey by Caroline Bruckner, managing director at the Kogod Tax Policy Center at American University, 69% of self-employed workers received no tax information from the platform they used to get work.

Because quarterly tax payments are estimates, it can be difficult to know if you’re paying the right amount. The month-to-month income volatility of the gig economy can contribute to this issue.

The IRS also reported that between 2010 and 2015, taxes due at the time of filing (aka the tax payments you’re most likely to cry about) grew 60%.

How to Avoid a Penalty for Underpaying Your Estimated Taxes

If you’re just embarking on your estimated taxes journey, read up on how to calculate your payments. Network with other self-employed people to get an idea of what tax time will be like, and learn others’ strategies for planning estimated tax payments.

If you messed up and owe more than you expected (been there, cried over that), don’t try to hide from the IRS.

Finally, remember that taxes are an all-year-round consideration when you’re self-employed. Get comfortable managing your cash, and save as much as you can to help weather any unexpected bills.

Lisa Rowan is a writer and producer at The Penny Hoarder.