The gig economy is booming in the U.S., but when it comes to taxes, many gig workers are unaware of their responsibilities. Consider this guide as a handy resource about the gig economy and federal taxes, with answers to many of the questions you may have about your earnings and the tax implications.
How Does The IRS Classify Gig Workers?
Gig workers generally fall into the category of independent contractors and are considered self-employed by the IRS.
How Much Does A Gig Worker Have To Earn To Report IncomeTaxes?
If an individual is required to file a tax return, he or she must include all income earned from gig work in the tax return. But here’s where the confusion may come in.
Employers are not required to provide a 1099-MISC to independent contractors who make $600 or less in a tax year. Also, independent contractors are not required to pay self-employment tax on net earnings of less than $400.
Yet, for independent contractors with earnings that do not meet the $400 or $600 thresholds, those earnings are still taxable income. A free tax calculator is highly recommended to help estimate your tax refund or burden so you aren’t caught off guard at tax time.
If Gig Income Is Taxable, Why Do Some Companies Fail To Send 1099s To Gig Workers?
As stated above, companies are not required to send a 1099-MISC to independent contractors who earn $600 or less. Also, companies that pay independent contractors through debit and credit card payment networks are not required to provide a 1099-K unless the contractors earn $20,000 or more or have more than 200 transactions.
Is A Gig Worker Considered Self-Employed If They Have A Full-Time Job, Too?
Yes, which means that if the worker’s net earnings from gig work are $400 or more, the gig worker is subject to self-employment taxes. Some gig workers change their withholding at their full-time jobs to allow for more taxes to be withheld from their paychecks to help cover some self-employment taxes for the gig work.
How Much Are Gig Workers Required To Pay In Self-Employment Tax?
The self-employment tax is 15.3 percent of net earnings, including 12.4 percent for Social Security and 2.9 percent for Medicare. A gig worker who earned $5,000 for the 2017 tax year would be required to pay $765 in self-employment taxes.
Why Do Some Gig Workers Have To Make Quarterly Estimated Tax Payments Instead Of Paying When They File Their Taxes?
If a gig worker pays their taxes when they’re filed and owes $1,000 or more, he or she could be assessed a penalty for underpayment. Workers must pay income taxes as they earn or receive income.
This is why employers withhold taxes from employees’ regular paychecks. Independent contractors do not have taxes regularly withheld, so quarterly estimated tax payments help independent contractors pay taxes as they earn income. If a taxpayer doesn’t pay enough by the due date of each payment period, he or she could be charged a penalty even if the taxpayer is due a refund.
Do I Need To File A Different Schedule C For Each Online Platform I Work For?
Those who find work on a variety of platforms should know that if the activities in which they engage are unrelated, then the worker is required to file a separate Schedule C for each gig. So, let’s say an individual works for OrderUp and Postmates, both food delivery services.
The activities are related, and the worker would complete one Schedule C, if their net earnings are $400 or more. However, if they did ride-sharing work for Uber and freelance writing for TaskRabbit, the activities would be unrelated. So if they owed taxes, the worker would have to complete a separate Schedule C for each of the businesses.
A free tax organizer is a convenient tool to help keep all your tax forms and information straight and in one place.
Are There Any Special Deductions Gig Workers Should Know About?
Independent contractors will find a number of tax deductions they may be able to apply to their business, including:
- Advertising: ads in community, school, or industry programs; Yellow Pages ads; Google AdWords; home booklets; and more
- Vehicle expenses: standard mileage rates using distance travelled to and from or actual expenses such as repairs, gas, insurance, and depreciation; Uber and Lyft drivers who use their vehicles more than half the time for business may be able to deduct up to $25,000 of the cost if their vehicle meets certain specifications; a mileage logger can be extremely helpful in tracking mileage for your taxes
- Travel, meals, and entertainment: expenses must involve the business; events/meals must be directly related to business purposes
- Marketing: business cards, flyers, social media, and client supplies
- Others: commissions paid to online platforms, membership dues, licenses, industry subscriptions, cell phone and internet fees, professional and legal fees, continuing education, and gifts for referrals
When you work in the gig economy, there are many ways to reduce how much you owe in taxes and make the tax season easier to deal with. And working with a professional tax preparer like our friends at Liberty Tax® will help make sure you keep all the hard-earned money you’re entitled to.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.