Being a gig worker comes with many perks, such as being your own boss and setting your own hours. But there’s one part of the job you’ll likely find taxing. Yes, you guessed it: tax season—that is, figuring out new tax rules, which forms you’ll need, how to pay estimated taxes and how to calculate what you owe the IRS.
Welcome to the Gig Economy
If you work full or part time as a gig worker, freelancer or self-employed contractor, you’re part of the gig economy, which is expanding three times faster than the overall U.S. workforce.
There are now 59 million Americans—or 36% of the U.S. workforce—doing gig work. And nearly one-third (31%) of current or recent gig workers said it’s been their “main job” in the past year, according to a survey by Pew Research Center.
The IRS considers you a gig worker if you’re making more than $400 from self-employment, even if it’s just a part-time gig or side hustle—so driving for a ride-hailing app like Uber, delivering take-out food for DoorDash, walking dogs for Rover or doing on-demand freelance writing work all count.
And just as working for yourself isn’t the same as working for a traditional employer, doing your taxes will be different, too.
How Taxes Are Different
As a gig worker, it’s up to you to track your income and document your expenses (as well as save receipts for business expenses you plan on deducting on your tax return) to determine your tax bill, according to TurboTax. And since you’ll no longer have an employer withholding income tax from your paycheck to pay the IRS, you’ll have to make estimated quarterly payments on your own via Form 1040-ES.
“Your taxes are going to be more complex,” says Amy Northard, a certified public accountant (CPA) and partner at The Accountants for Creatives. “Knowledge is power. The more you know how taxes work, the better. By creating good systems, tax time won’t be so terrifying.”
Income and Self-Employment Taxes
Another major thing to be aware as a gig worker is that you not only have to pay income taxes but also self-employment taxes.
Let’s say you drive for Uber. You’ll have to pay taxes to the U.S. government (and maybe state income taxes depending on where you live) on the income you earn from your trips, and you’ll also have to pay a self-employment tax.
Income tax is imposed on money you earn, such as gig wages, salaries, dividends, interest, rents, royalties, lottery winnings, etc.
Self-employment tax, on the other hand, is the tax you pay for Social Security and Medicare benefits you’ll receive when you retire. People working for traditional employers don’t feel the financial pain of this tax as much because their company pays 50% of it to the IRS and the other 50% is deducted directly from their paycheck.
But if you’re a gig worker and make over $400, you must pay 100% of your Social Security and Medicare taxes. The total “self-employment tax” rate is 15.3% of your gig work income: 12.4% for Social Security and 2.9% for Medicare.
Forms You’ll Likely Need
You’ll also, unfortunately, have to fill out more forms, says Jody Padar, a CPA and vice president of tax strategy and evangelism at April, a tax-filing platform. In addition to Form-1040, you’ll need to attach Schedule C (where you’ll report your gig business income and expenses) and Schedule SE (which calculates the amount of self-employment tax due). Tax forms are available online at the IRS’s Tax Forms and Publications page or by phone at 800-TAX-FORM.
To tally up your income, you’ll need to refer to IRS Form 1099-NEC or 1099-MISC, which is issued by any client that paid you more than $600. If you have multiple clients, you must add up all the income from all the 1099s you receive. The IRS also requires you to report income even if you didn’t receive a 1099.
Money you receive from clients on payment apps like Venmo must be reported as well. “Basically, any dollar you receive for services needs to be reported as income,” Northard says.
Tax-Filing Tips From CPAs
Ready to get started? We turned to the experts for their best advice for giggers when it comes to tax season.
Keep complete, accurate records. The first thing on your tax to-do list is to keep good records. “Stay on top of it,” Northard says. And make sure you don’t commingle business funds and accounts with personal money. Only pay business expenses with cash from your business account. “That’s good financial hygiene,” Padar says. There are tools and apps out there to help keep your books organized, such as the Moves Financial app used by rideshare drivers, or small-business accounting software like FreshBooks and QuickBooks.
Set aside cash for taxes you will owe. Since it’s difficult for nonsalaried gig workers to know exactly what they’ll owe in taxes, Padar says a good rule of thumb is to assume that 30% of your income will go to taxes.
So, every time you get paid, sock away roughly one-third of your wages into a savings account. That way you’ll have a pool of money available when it’s time to pay your taxes. Check out Riverstones Vista Capital ’s high yield savings accounts and money market accounts, which allow you to access your money quickly and aren’t vulnerable to market fluctuations.
“The No. 1 tax headache for newly self-employed gig workers is that they don’t budget for the tax impact,” Padar says.
To get an idea of what you might owe, use tax estimators such as those offered by Tax My Gig and Everlance’s 1099 Tax Calculator.
Pay estimated quarterly taxes on time. Another way to avoid IRS penalties is to make four quarterly tax payments that are equal to your tax liability in the prior tax year, adds Northard. Estimated tax payments are due on the following dates: April 15, June 15, September 15 and January 15, according to the IRS. You may send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone or from your mobile device using the IRS2Go app.
Take Advantage of Tax Deductions
And don’t forget you can lower your tax bill with deductions for legitimate business expenses. If you’re an Uber driver, for example, that means write-offs for miles driven in your car while working. Or if you’re a freelance writer who uses a home office, you can deduct things like office supplies, internet and phone bills, publications and subscriptions, and home office expenses.
Adam Shell is a freelance journalist. He has worked as a financial markets reporter at USA Today and an associate editor at Kiplinger’s Personal Finance magazine.
Illustration by Zara Picken
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