A gig worker is someone who completes temporary or freelance work. They are usually independent contractors hired on an informal or on-demand basis by multiple clients.
For example, gig work can include any income earning activity from rideshare drivers for companies like Uber, food delivery drivers for apps like GrubHub, freelance work for publications, photography, childcare services, cleaning services, music and entertainment performances, and social media influencers.
With the rise of the gig economy, you can easily fall into a sticky situation with your taxes if you’re not careful. Morgan V. Giebel Cannon, manager at 415 Group, explains that for people looking to make gig work their part- or full-time job, it’s imperative that they reach out to a tax professional early on for tax planning.
In recent years, many workers have become engaged in the “gig” economy. You may think of gig workers as those who deliver take-out restaurant meals, walk dogs and drive for ride-hailing services. But so-called gig work seems to be expanding. Today, some nurses have become gig workers and writers in Hollywood who recently went on strike have expressed concerns that screenwriting is becoming part of the gig economy.
There are tax consequences when performing jobs that don’t involve taxes being deducted from a regular paycheck.
The bottom line: If you receive income from freelancing or from one of the online platforms offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.
Gig worker basics
The IRS considers gig workers those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb and DoorDash.
Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other federal law protections, and they aren’t part of states’ unemployment insurance systems.
In addition, they’re on their own when it comes to retirement savings and taxes.
Make quarterly payments during the year
If you’re part of the gig or sharing economy, here are some tax considerations.
- You may need to make quarterly estimated tax payments because your income isn’t subject to withholding. These payments are generally due on April 15, June 15, September 15 and January 15 of the following year. (If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.)
- You should receive a Form 1099-NEC, Nonemployee Compensation, a Form 1099-K or other income statement from the online platform.
- Some or all of your business expenses may be deductible on your tax return, subject to the normal tax limitations and rules. For example, if you provide rides with your own car, you may be able to deduct depreciation for wear and tear and deterioration of the vehicle. Be aware that if you rent a room in your main home or vacation home, the rules for deducting expenses can be complex.
Maintain meticulous records
It’s important to keep good records tracking income and expenses in case you are audited by the IRS or state tax authorities.
Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an unwanted surprise when you file your tax return.
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Online platforms have really opened the doors for gig work for all people and industries. There is a huge influx of people participating in these money-making activities with little understanding of the related tax consequences. It’s important to know that gig work qualifies you as a “self-employed individual” with the IRS.
Whether you’re completing gig work part time or full time, expect an impact on taxes. If most of your income is derived from gig work, there is a much greater need for tax planning.
In the case of gig work, tax planning really just means paying estimated tax payments. The question arises of how much to pay and when. Estimating your quarterly payment amounts starts by estimating your income from both your full-time, wage paying, job and your additional gig income. If a taxpayer does not have experience in projecting their taxable income, a tax professional can assist.
Gig workers can avoid large tax bills at year-end by paying in taxes throughout the year. This will also help you avoid penalties and an accumulation of interest for underpayment of estimated taxes.
If only a small portion of income is from gig work, the taxpayer may be able to adjust their withholding from their W-2 income to cover the tax obligations, and no estimated tax payments would be required. This would not be the case for taxpayers where the majority or all of their income is derived from gig work.
Deductible business expenses can help to offset gig income. The IRS provides a very inclusive list of deductible businesses expenses; however, it can be difficult to determine what costs are and are not deductible. 415 Group or other tax professionals can assist in making these determinations accurately to keep the taxpayer compliant with the rules and regulations provided by the IRS.
The biggest hurdle is awareness. Many taxpayers are not aware that the money they make “on the side” is still taxable income and can have substantial tax consequences. The key is to start talking to a tax professional before or at the start of your gig-work.
What if you’re a business that hires gig workers?
Tax planning can also become more complex for those in this position. For example, self-employed individuals and small businesses who are hiring gig workers may be required to file a 1099 in some cases.
415 Group can assist self-employed individuals and businesses in determining if an IRS 1099 Form needs to be issued. Although the firm does not prepare or process 1099 forms, we can recommend certain software packages for getting the forms filed in the most efficient and cost-effective way.
No matter how you get involved with gig work, we recommend reaching out to your trusted advisor. This is especially true as your “gig” – or your business utilizing gig work – grows. There can be numerous opportunities for tax savings that may not have been applicable as a smaller endeavor.
Contact 415 Group today to find out how we can help.