Tax Tips for the Gig Economy
Tax Tips for the Gig Economy
Whether you call it a side hustle, freelance gig, or moonlighting, if you're working outside of regular business hours, turning vacation days into work days, or filling up your weekend with stuff to do that can make you money, you're officially part of the gig economy. While you might enjoy part-time only work or are doing it purely to supplement your income, for many gig workers, doing something new or different or challenging your skills in new ways can be invigorating and end up actually being good for the long-term health of your career.
But in doing work either part-time or outside of your normal taxable W-2 wages, puts you in a whole new ballpark. And with that, comes a little more responsibility for making sure your addtional income is above board.
Who Makes Up the Gig Economy
According to Gallup, 36% of all U.S. workers are participating in the gig economy in some capacity—that's more than one in three workers. Who these workers are and what they are doing ranges. There are contract firm workers, such as a traveling nurse, who are employed by one company to serve another on a contractual basis. Independent contractors are freelance workers, such as a graphic designer, and considered self-employed. Workers who are on-call, such as a substitute teacher, and hired on an "as-needed" basis. Workers who get gigs through an online platform or app, such as Uber or Lyft, TaskRabbit, Upwork, or DoorDash. And, lastly, are temporary workers, who have short-term jobs assigned to them by a temp or staffing agency.
What Gig Workers Need to Know About Taxes
Now, when it comes to taxes, if you make money in the gig economy, there are a few things to keep in mind when it comes to filing and paying your taxes.
- If you're a sole proprietor, are a member of a partnership, or have set up a limited liability company (LLC), you usually file a Schedule C with your Form 1040 personal tax return. The good news is that the Tax Cuts and Jobs Act of 2017 allows you to automatically deduct up to 20 percent of your income right off the top, up to a certain threshold.
- The Internal Revenue Service (IRS) considers gig economy workers to be self-employed, so they are subject to self-employment tax, which is a combination of Social Security and Medicare taxes.
- The IRS also requires you to submit quarterly estimated income tax payments. You have to make these payments if you believe you'll owe more than $1,000 in taxes in any given year. How much you pay can be a little bit of a guessing game. But if you make payments equaling at least 90 percent of what you owe, you can avoid any penalties for underpayment.
- Don't forget about state and local taxes, too. Most states and municipalities require you to pay taxes on your income, make quarterly estimated taxes, and pay any number of other taxes (sales taxes, business privilege taxes, employer taxes) on your taxable income.
What Gig Workers Can Deduct
Naturally, the less taxable income you have, the less you'll pay in taxes. That's why deductions are so important. You can take any allowable business deductions to reduce your taxable business income even if you don't itemize your personal deductions on your tax forms.
If you have an office in your home, you can deduct a number of expenses, such as business equipment and supplies, repairs, and a portion of certain utilities and insurance. Be careful, though. The IRS has specific rules for what does and doesn't qualify as a home office.
You may also deduct expenses associated with your car or travel, advertising and marketing, and subscriptions and memberships to professional organizations, among others.
How to Maximize Your Return
Filing and paying taxes in the gig economy can be a tedious job. But if you get organized, you'll have a better time of it. Here are four simple tips to keep top-of-mind:
- Keep great records. It's no fun being audited, but if you do, you'll want to have impeccable records. This includes records of income, copies of all your receipts, and schedules of all your mileage and other auto expenses.
- File and pay your taxes on time. Filing and paying your taxes on time will allow you to avoid late penalties. Even if you file for an extension, try to estimate what you will owe, and pay it by the original tax due date.
- Pay estimated taxes. To avoid penalties, paying quarterly estimated taxes throughout the year is a must.
- Hire an accountant. A reliable accountant can make sure your taxes get filed on time, and that you maximize your deductions. In the long run, the money you spend on tax accounting help will likely pay off for you many times over.
If you stay organized and understand your tax responsibilities, you can breeze through tax season and get back to your gig.
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