Tax Do's and Don'ts for Gig Workers

About 45% of adults in the U.S. have worked as an independent contractor or “gig worker" at one time during their career, according to MBO Partners' State of Independence 2023 Report.

Gig work may include driving for a ridesharing service like Uber or Lyft, or providing specialized consulting or business services, though it's not just for side hustlers or workers in between full-time jobs. Today, many experienced professionals seek the variety and flexibility offered by contract and project-based gig work.

Yet many independent contractors are surprised to discover that freelance work makes them small business owners in the eyes of the IRS. Being your own boss can get complicated when you need to start making estimated tax payments, tracking income and expenses, and filling out different forms and schedules with your tax return.

The following tax dos and don'ts for gig workers can help.

Do: Set aside money for taxes

In the U.S., federal income taxes are a “pay as you go" system. When you work for someone else, your employer withholds taxes from your paycheck and sends them to the IRS on your behalf. As a self-employed person, you're required to estimate your tax liability and send estimated payments to the IRS four times per year: April 15, June 15, Sept. 15, and Jan. 15 (for the fourth quarter).

If you don't make estimated payments (or have enough tax withheld from another job to cover your gig work income), you could end up owing a lot of money when you file your tax return.

Unfortunately, estimating the amount you owe isn't simple. It depends on your tax bracket, the types of income you earn, and the deductions and tax credits you're able to claim. A good rule of thumb is to set aside 25% to 30% of your self-employment income for taxes. If you want to develop a more precise estimate of how much you owe, a tax professional can help you work through the calculations. LegalZoom offers LZ Books, an accounting software solution that auto-categorizes income and expenses into tax-ready categories, plus LZ Books makes it simple to export data for your tax preparer.

Don't: Forget about self-employment taxes

When you receive a paycheck, your employer withholds Social Security and Medicare taxes (collectively referred to as FICA tax). Self-employed people pay FICA taxes as well in the form of self-employment taxes.

In addition to income taxes, your self-employment income is subject to self-employment tax at a rate of 15.3%. The good news is that self-employment tax is included in the 25% to 30% rule of thumb mentioned above. Your quarterly estimated income tax payments will include your projected self-employment tax obligation.
 

Do: Open a business checking account

Keeping your business and personal finances separate is crucial. The best way to do that is to open a separate business checking account and run all business income and expenses through that account. Not only does having a separate business checking account look professional, but it also makes it easier to track business expenses.

At the end of the year, it's easy to claim every available tax deduction because they're all on your business checking account statements. Otherwise, you'll waste hours sorting through receipts or picking business deductions out of a bank statement full of personal expenses.

Don't: Forget to save for retirement

Gig workers may not have access to an employer-sponsored retirement plan, but that doesn't mean you don't have options for saving for retirement.

Self-employed people have a variety of retirement savings options, including:

• Individual retirement account (IRA)
• Simple IRA
• SEP-IRA
• Individual 401(k)
• Defined benefit plan

Each retirement savings option comes with its own contribution limits and rules. It's a good idea to work with an accountant or financial advisor who can help you choose the right option based on your financial situation and goals.

Do: Track your mileage

Deducting the miles you drive for business can be a valuable tax break for many gig workers. Even if your work doesn't involve driving for a rideshare service, you may use your personal vehicle to run business errands, meet with clients, or attend business networking events.

However, claiming a deduction requires keeping track of business miles and personal miles. If you don't keep track of those miles throughout the year, you have no way to accurately calculate your deduction when you file your tax return.

Fortunately, there are several ways to record your business miles. You can keep a logbook in your car's glove compartment or use an app like MileIQ to track miles for you.

Don't: Deal with taxes alone

Being self-employed brings a whole new level of complexity to filing your tax return. That's why it is a good idea to work with a certified tax professional who can help you make sense of your business income and expenses and file complete and accurate tax returns.

If you're used to handling taxes on your own, it might seem like working with a tax pro would be cost-prohibitive. But a good tax professional doesn't just help you file your tax return. They can also provide valuable advice to help make your business more tax-efficient and lower your tax bill. That kind of guidance can eventually pay for itself.

Don’t: Forget about IRS Form W-9

A gig worker may earn enough income from one payer in the year that a Form 1099 may be required to be issued to the recipient. Depending on the means of payment, this could be a Form 1099-NEC or a Form 1099-K. The payer should provide IRS Form W-9 to officially request the gig worker’s identifying information in order to correctly issue the appropriate IRS Form with the correct information. It is ultimately the gig worker’s responsibility to ensure that the payer has the correct information, so be sure that you discuss Form W-9 and submit it to any payer as may be required. 

Do: Report all income received from all sources

When reporting your financial information on an income tax return, you are required to report all income received from all sources. As stated previously regarding IRS Form W-9, there are requirements where a Form 1099-NEC or Form 1099-K must be issued to you. However, tax law requires you to report all income received for your gig work, whether or not you have received a Form 1099-NEC or Form 1099-K regarding part, or all, of that income.