I was in a Political Science course recently and was surprised to realize that there are some who do not understand the correlation between the tax dollars we pay and the money that the government has to spend. In other words, our taxes are what the government has available to them to spend.
Consider the following: what if your weekly paycheck began coming to you on an irregular basis and in varying amounts? Besides the obvious frustration with our employer, think about how you would be able to pay your bills, buy groceries, or even have the gas to get to work. Would this change the way that you approached your spending? How about your stress level? Now, on top of this new varied pay schedule, imagine that your employer comes to you once a year and asks you to refund them a substantial over-payment of wages. Are you freaking out yet?!
Let’s add another layer to this. Not only is your income coming in sporadically and you have to pay some back, now your employer tells you that you have to apply for your pay and will get paid when they get paid from their customers. You have a great week and you work a lot of hours and go through the process of requesting your pay, but you have been waiting a month or even a year to get that payment. Even worse, it never comes in. During a busy time you forgot to put in your request for payment and by the time you remember it is past the deadline for collecting that money from your employer.
This is what the Treasury Department of the United States goes through each year. I have no interest in getting political and want to just talk numbers and cash-flow. The current year budget is based on an estimated $3.643 trillion. According to The Office of Management and Budget, reported by www.thebalance.com, “the federal government’s revenue comes from Individual Income taxes that contribute $1.822 trillion, over half of the total. Another third, $1.295 trillion, comes from your payroll taxes. This includes $949 billion for Social Security, $289 billion for Medicare, and $46 billion for unemployment insurance.” (https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762)
IRS Commissioner Charles Rettig reported on 4/10/19 that as of March 22nd, the IRS had issued $191 billion in tax refunds. That is 5.25% of the total federal budget. You may be thinking that is a rather small percentage and manageable, so let’s throw in your household income and see what happens. Assuming you bring home $1,000 per week for a total of $52,000 per year, you would be asked to refund your employer $2,730 every year. That is an average of $52 per week that you receive.
That $52 per week may be manageable, but there is more. The IRS estimates that the average Tax Gap (the amount of uncollected tax) for the each year during 2008 – 2010 was $458 Billion per year. That is 13.23% of the total budget! On top of that, the IRS was holding on to approximately $1.4 Billion in refunds that were nearing the three year deadline for payment. That accounts for another 3.85% of the budget. Lucky for the government, anything that is not claimed is sent back into the coffers to offset the refund paid out and the Tax Gap.
Now, instead of just the $52 per week that you have to hold back, your employer is going to keep about $6,900 of your total salary. We are up to $185 per week that you may or may not receive over the course of the year. Just for fun, your employer remembers that they didn’t ask you to pay back enough a couple of years ago so they request an additional $2,000 to be paid back to them, another $38 per week! That brings our grand total to $223 of each pay check that we may or may not receive or be able to keep. That equals 22.3% of your $52,000 annual salary. That is a significant number!
Looking at the government budget of $3.643 trillion, that is $8.124 billion in money that may or may not come in and if it does, it has to go back out again.
With the release of the new W-4 form and the adjustment to the withholding tax tables, the guiding principal was to close the gap between what is coming in and what has to be refunded. The tax code is setup as a “pay as you go” system to help encourage a steady cash-flow. For most of us our taxes are taken out of our paychecks and we do not even think about it. However, how many of us have a side hustle or a second job or are out there on our own running a small business? With the raise of the gig economy (Uber, Lyft, Shipt, Instacart, etc.) there is a need to be aware of tax implications of this type of income.
My Free Advice this Friday: Check your withholding! Make those estimated tax payments! Being proactive helps the cash-flow for both you and the Treasury Department.
Check back next week for a look at the taxing changes for your side hustle.