If you’re a gig worker, taxes can be more confusing than keeping track of all your gigs. But Liberty Tax® has answers to the s you should be asking to help you sort out when, how, and how much you should be paying and ways to hold onto as much of the money you earned as possible.
#1: Do I Have To Pay Taxes?
Yes, income is almost always taxable on a federal and state level and sometimes on a local level as well. This is true even if you receive cash payments.
#2: Can I Wait Until Tax Season To Pay The Taxes That I Owe?
No, taxes are a pay as you go requirement. If you don’t have an employer withholding taxes from your income every pay period, it’s your responsibility to report and pay taxes on a quarterly basis.
#3: I Didn’t Get Any Paperwork Showing How Much I Made, So I Don’t Owe Taxes, Right?
Sorry, but the paperwork is your responsibility as a gig worker. You should find a good system for ensuring that you keep track of the money you receive and the expenses of your gig.
#4: But Isn’t The Online Platform Supposed To Track What They Pay Me?
Online platforms are not required to give you paperwork unless your earnings hit $600. If they pay you by debit or credit transactions, they aren’t required to send paperwork unless you have 200 transactions or earn $20,000.
So, keep track of your earnings, which can be easier with a free tax organizer, and make sure you share them with your tax preparer.
#5: How Will The IRS Know What I Earned If I Didn’t Get Paperwork?
It’s the IRS; they know everything. But seriously, online platforms are required to submit your earnings of $600 or more to the IRS. And, audits happen. So don’t forget to report and pay your state and, if applicable, your locality.
#6: How Much Do I Have To Pay in Taxes?
This depends on too many factors to provide a simple answer. But, in addition to your regular federal, state, and local taxes, if you made $400 or more as a gig worker, you have to pay self-employment tax of 15.3 percent of your net earnings. A free tax calculator is a convenient way to help you estimate how much you’ll owe at tax time.
#7: I Don’t Own a Business, So Why Do I Have to Pay Self-Employment Taxes?
You may not own a business, but you are considered an independent contractor. Therefore, you must pay self-employment tax, which includes Social Security and Medicare taxes. When you work for an employer, those taxes are typically withheld from your paycheck.
#8: If I Have To Pay Self-Employment Taxes, Do I Also Get to Take Deductions?
Yes, definitely. Let’s say you drive for OrderUp. You may be able to take deductions for things like gas, cell phone usage, car detailing, and more, as long as the expenses are directly related to your work.
When it comes to vehicle usage, you have two options for your deductions. You can track your miles and take the standard mileage deduction, which is 53.5 cents per mile for the 2017 tax year, or you can calculate actual costs of using your vehicle.
Actual costs include oil changes, tire rotations, and other types of vehicle maintenance you may do in connection with your gig work. For this method, you’ll need to keep meticulous records on your work-related expenses and share those records with your tax preparer.
#9: I Have a Full-Time Job and Do Other Stuff on The Side. Isn’t That More Like a Hobby?
If you want to call it that, you can. But the IRS calls you an independent contractor and expects you to pay self-employment taxes on earnings of $400 or more.
#10: What About the Tips I Get From Customers? Are They Taxable, Too?
Tips count as income, so yes, they are taxable. However, if you make less than $20 in tips in a calendar month, you don’t have to report the income. Tip income is taxed at the 15.3 percent tax rate because it is subject to Social Security and Medicare taxes. If you do get tips, it’s a good idea to keep a tip record.
#11: If I Get My Company To Withhold More Money From My Paycheck, Do I Still Need To Pay Self-Employment Taxes?
That answer is yes, but. Yes, you pay self-employment taxes. But you may have enough withheld from your paycheck to cover your self-employment taxes, too. So, let’s say you typically get a $400 tax refund.
Depending on how much you earned as an independent contractor, that $400 could actually cover your self-employment taxes. A free W-4 withholding calculator can also help you plan ahead and avoid surprises at tax time.
#12: I Work For A Few Different Online Platforms. Do I Need To Know Anything Special About My Taxes?
Along with the things we’ve mentioned above, you’ll likely need to file a different Schedule C (your business tax return) for each of the online platforms for which you do contracting work. Your tax preparer can really help you here.
#13: So, I’m Supposed To Report My Income And Pay Taxes. But What If I Don’t Do It?
Will it surprise you to learn that you could incur lots of penalties? On the federal level, one type of penalty is the failure-to-pay penalty. This is equal to 0.5 percent of your unpaid taxes for each month, or a portion of a month, after your quarterly estimated tax payments are due.
Another type of penalty is the accuracy-related penalty. This fee is equal to 20 percent of the underpayment if you purposely or substantially understated how much taxes you owed. And in another whole level of penalties, you could owe interest that accrues on the unpaid tax amount. That doesn’t even begin to get into state and local penalties.
How To Make Tax Season Easier
When you work in the gig economy, be sure to take advantage of the 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 legally entitled to.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.