When the COVID-19 pandemic hit, the number of people engaged in the sharing or “gig” economy increased. With many workplaces closing and others decreasing their hours, many have turned to gig work to supplement their income. While these jobs are very beneficial, it’s not the same as working a job that deducts taxes every paycheck. Gig work and other independent jobs have tax obligations that may be new to you.
If you freelance or work remotely, your income is usually taxable. Even if you don’t receive a tax form, you are likely still required to pay taxes on the income you make.
If this is confusing to you, or you’re new to the gig economy, don’t worry. Today, we will break down the basics of gig work and the essential tax obligations you need to know.
The Basics for Gig Workers
The IRS recognizes gig workers as independent contractors. In that sense, you are seen as self-employed, a status that comes with additional tax implications. Some examples of work that is commonly done as an independent contractor include:
- Ridesharing, such as with Lyft and Uber
- Delivery driving, such as DoorDash
- Renting out property
- Creative services, such as writing, graphic design, and photography
- Event jobs
- Web design
- Software development
- Running errands
- Dog walking
Many independent contractors work multiple jobs, which may require various tax forms. But as an independent contractor, you will typically receive a 1099 form at the end of the year. Because pay is not typically taxed for contractors, the responsibility to set aside funds to pay taxes falls on them. Therefore, as an independent contractor, you’ll be required to pay taxes either at the end of the year or throughout the year to reduce your tax burden come tax season.
Independent contractors don’t typically get benefits from their job, such as health insurance and 401k. Minimum wage or other protections of federal laws don’t apply, nor do the states’ unemployment insurance systems. All of these things are expected to be covered independently.
Pay Taxes Throughout the Year
Gig economy taxes aren’t too complicated when you have the correct information. Here are some things you should know.
If you owe the IRS more than $1000 annually, quarterly estimated tax payments may be required. These payments are generally due on the following:
- April 15 for income from Jan. 1-March 31
- June 15, for income from April 1-May 31
- September 15, for income from June 1-Aug. 31
- January 15, for income from Sept. 1-Dec. 31
If your net earnings are over $400 a year, you are required to pay self-employment taxes. Anything under that does not require payment. However, you may only have to pay once a year if you owe under $1000.
If you find work through an online platform, the platform you work for should provide you a Form 1099-NEC, Nonemployee Compensation, a Form 1099-K, or another income statement. But, if you don’t receive these forms, you will be responsible for calculating your self-employment taxes and paying the installments.
Some workers pay in monthly installments because they find it more manageable financially. Monthly installments are not usually a requirement, however.
Keep Good Records
Keeping good records is one of the most important things you need to do when working independently. If you’re audited and don’t have records proving what you filed, you could suffer from penalties.
Keeping good records includes holding onto receipts, keeping records of gas mileage, tracking cash payments, and much more. Every expense you make, even if it seems small, should be tracked throughout the year.
The IRS allows some personal expenses to be deducted, such as cars and in-home offices, if used for business purposes. Independent contractors often work from home and use personal tools for working. For instance, if you use an online platform, your phone, computer, and internet may all be eligible expenses.
You’ll Likely Qualify for Deductions.
When you keep good records, you can prepare to report those records that qualify you for certain deductions. Some of these deductions include internet, in-home office, office supplies, cell phone, and transportation. You may have partial or full deductions.
These can add up quickly, saving you a lot of money when considered altogether. Be warned though, only report work-related expenses that you can validate. The IRS has stiff penalties if you are audited and found to be fraudulently reporting expenses and deductions, or if you cannot prove you purchased items with receipts or bank statements.
For example, if you purchased a new computer during your tax year and use it for work, you may include it in your taxes. However, if you no longer have the receipt or any record of the purchase, you may get penalized if audited.
Set Up an Appointment Today
If you find these tax obligations overwhelming, we have good news. We can help.
Perhaps you’re still on the fence about hiring a professional. If you are a gig worker with one or even multiple jobs, hiring a tax management professional like the experts at Lloyd & Hodge can be a life-saver.
We can help you with tax management, planning your expenses and reducing your tax obligation throughout the year. In addition, Lloyd & Hodge offer a variety of accounting services, including bookkeeping, payroll, cashflow & budgeting analysis, and personal bill pay.
If you’re tired of muddling your way through your finances or simply don’t have the time to properly manage them, contact Lloyd & Hodge today and get back to enjoying life and doing everything you do best.