It wasn't long ago that most people worked for someone else. They clocked in at the beginning of the day, clocked out at the end, and collected a regular paycheck. Many workers still do that, but an increasing desire for people to work for themselves combined with a need for businesses to save money has led to the rise of something new: the gig economy.
At Cook Martin Poulson, we work with gig economy workers every day. We understand the tax rules that apply to gig workers and how their income can fluctuate and impact their taxes. We are here to provide the information and guidance you need to meet your obligations.
If you are a gig worker, keep reading to learn about tax dos and don'ts that apply to self-employed contractors.
What is the Gig Economy?
The gig economy refers to a percentage of employees who are self-employed and may contract work for one or more companies. In 2006, the Bureau of Labor Statistics estimated that between 2% and 4% of all workers were gig workers, while 7% worked as independent contractors.
In the last 15 years, those numbers have increased dramatically. According to one survey, between 25% and 30% of all Americans have participated in the gig economy. The engagement in the gig economy includes a broad spectrum of workers, from those looking to supplement income to those that rely on gig work for their primary income. If you are a contractor or are self-employed, you are part of the gig economy.
There is more than one way to define a gig. The simplest definition is that gig work involves doing a one-time job on a contract basis. An example might be writing a blog post, designing a logo, or building a website. Many gig workers find jobs through digital platforms and apps. Some do work on an ongoing basis and may have long-term contracts that stop short of full employment.
Gig work may be part-time or full-time. Many people supplement their income by doing gig work in their free time.
Gig Work Tax Basics
Whether you occasionally work as a contractor or earn all your income from gig work, you need to pay taxes. When you file your tax return, you need to report the income you earned for gig work throughout the year.
It is essential that you report all income you earn for gig work, including the following:
- Part-time, temporary, and side work
- Income that is not reported on a 1099-K, 1099-MISC, or 1099-NEC
- Income that is paid in any way, including cash, property, goods, or digital currency
As a gig worker, it is your responsibility to keep track of all income you receive from gig work.
Also crucial to your gig work is to track your expenses related to your gig. That includes keeping all receipts related to your business. Additionally, gig workers should make sure to track their vehicle use. An easy way to track business miles is to use a mileage tracker on your phone. Also, be prepared to pay estimated taxes every quarter.
How Do Gig Workers Pay Taxes?
Whether you occasionally work as a contractor or earn all your income from gig work, you need to pay taxes. The IRS requires that gig workers report any income over $400 on their tax return.
Here are the steps to follow to meet your taxpayer obligations as a gig worker.
- Keep track of all income from gig work even if you don't expect to receive a 1099 form from the person who hired you to do the contract work.
- Keep track of all business-related expenses, as you may be able to lower your taxes by taking deductions for these.
- Pay your quarterly estimated taxes on time. When you are not an employee, you are required to pay both the employer's and the employee's share of federal taxes. Due dates are as follows:
● April 15 for payment period January 1 - March 31
● June 15 for payment period April 1 - May 31
● September 15 for payment period June 1 - August 31
● January 15 for payment period September 1 - December 31
- Prepare to file your taxes by collecting all income forms (1099s, etc.), receipts, and tax payments.
- File your taxes and pay any additional amounts that are due.
You can avoid penalties and fees by paying your estimated taxes on time.
Tax Challenges Faced by Gig Economy Workers: Do's & Don'ts
As a gig economy worker, you must take care not to make mistakes on your income tax return. When you are self-employed, there are some important steps you can take to meet your obligations and avoid problems. Let's start with the things you should be doing.
- DO pay your estimated taxes each quarter. Gig workers can run into trouble when they don't pay estimated taxes. A good rule of thumb is to send 20-25% of your profits to the IRS and 5% to your state filing agency.
- DO account for the self-employment tax of 15.3%. When you work for an employer, they take care of this portion of your taxes, which goes to Social Security and Medicare. As a gig worker, you need to pay it.
- DO keep your business and personal expenses separate. Mixing the two is a good way to get audited, so keep meticulous records.
- DO take the home office deduction if you qualify -- but keep in mind that you must have a dedicated space that you don't use for anything else to take it.
- DO hire a tax professional to help you file accurately. Tax pros understand the ins and outs of the gig economy!
Here are a few common mistakes to avoid.
- DON'T make the mistake of deducting expenses that don't apply to your work. For example, you can probably deduct part of your wireless bill if you're online for your job, but not all of it.
- DON'T let a lack of money stop you from filing your tax return on time. The fees and penalties are worse for not filing than they are for not paying on time.
- DON'T forget to report all income even if you don't get a 1099, including cash payments and barters.
- DON'T ignore potential deductions because you're not sure you qualify. Ask a tax professional instead!
As a taxpayer, avoiding common mistakes on your tax return can save you time, money, and stress. If you are not sure where to start, we suggest that you use the information here as a starting point and connect with a tax professional to get answers to your questions.
Common Tax Deductions for Gig Economy Workers
One of the biggest issues with being part of the gig economy is understanding the deductions you can take on your tax return. Here are some of the most common deductions:
- You may deduct half of your 15.3% self-employment tax as an expense.
- You may deduct the cost of maintaining a home office that is used "regularly and exclusively for business." You have the option of itemizing or using the simplified method of $5 for each square foot up to 300 square feet.
- Medical and dental insurance premiums may be deductible but not if you're eligible for coverage under your spouse's employer's plan.
- Continuing education expenses, including tuition, may be deductible if you take classes that relate directly to your gig work.
- Mileage and gas may be deductible if you use your car for work, for example, if you earn money by driving for Uber or Lyft.
- Internet and phone bills may be deductible if you use them for business but be meticulous about deducting only business-related expenses.
- Business travel is deductible if it requires you to be away for longer than a traditional workday and spend the night away from home.
- Business meals are usually deductible but the deduction applies only to meals that you buy while traveling for work or while meeting with a client or customer.
- Office supplies used for work are deductible.
- If you pay to advertise your services, the advertising expenses may be deductible.
- Donations to a retirement account such as an individual 401(k) or IRA may be deductible.
You may be required to pay taxes you wouldn't have to pay as an employee, but if you take advantage of every deduction that applies, you can do a lot to minimize your tax bill.
Stimulus Bill Tax Changes for Gig Workers
In March of 2021, President Joe Biden signed the American Rescue Act into law. In addition to providing stimulus payments to many US workers, the new bill made some important changes to income taxes for gig workers.
Both changes are related to the work done through gig economy websites such as Etsy, Uber, DoorDash, and Lyft. Previously, these companies were required to send a 1099-K form only to workers who earned over $20,000 in income or had 200 transactions. Most workers who received only part of their income from gigs were exempted, and many may not have reported their income accurately.
The new law changed both the income threshold and the number of transactions. Starting with the 2022 tax year, gig companies must send a 1099-K form to anybody who earned $600 or more regardless of the number of transactions.
The result is expected to bring in billions of dollars in revenue to the IRS. It may also be an issue for gig workers who have underreported their income and self-employment taxes in the past.
Let Our Tax Experts Handle the Complexity of Gig Economy Taxes
If you are part of the gig economy, don't let concerns about the IRS cause you stress or anxiety. The best way to avoid tax problems is to work with a dedicated tax professional who can provide you with the necessary information to pay your estimated taxes. Cook Martin Poulson professional tax preparer, can help you uncover the applicable deductions you qualify for to get every dollar you deserve. Contact us to schedule an appointment today!