According to the Bureau of Labor Statistics, gig workers make up 36% of the total U.S. workforce. The gig workforce, which includes a wide variety of short-term, temporary, and freelance workers, as well as independent contractors, enjoys flexibility and freedom in terms of working hours and earnings.
However, gig workers face a unique set of challenges, including financial ones. In addition to finding a stable income as a gig worker, many have to navigate the intricacies of filing taxes for gig work. The process for how to report gig work on taxes is different than that of traditional workers, which can come as a shock even to seasoned gig workers.
Gig work, as defined by the IRS, is an activity you do to earn income, including, but not limited to, driving a car for rides or deliveries, renting out property, running errands, selling goods online, and providing creative or professional services. In many cases, this work is done on a digital platform via an application or website (think Uber or online food delivery services).
One of the most common misconceptions of the gig economy is that gig workers don’t have to pay taxes. The truth is that gig workers will need to pay taxes on any earnings that total more than $600 from each job, client, or service.
You should receive a tax form called Form 1099-MISC in the mail or digitally by Jan. 31, 2021. Each client or business that you work for during a taxable year should send you this form so that you can both accurately report your earnings. If you don’t receive a form, that doesn’t mean you don’t have to pay taxes. As such, you must keep track of your earnings throughout the year and report them when you’re filing taxes for gig work to protect yourself if you are ever audited by the IRS.
Additionally, gig economy workers must pay their estimated tax payments four times a year on April 15, June 15, Sept. 15, and Jan. 15, for the previous quarters’ earnings if they know that they’ll be making a profit in the coming months. A good rule of thumb is to estimate that 25% to 30% of your profits will need to go toward paying taxes throughout the year.
Taxes and gig work can be a tricky combination, but don’t let that overwhelm you. However, you’ll need to determine whether you’re a sole proprietor. In most cases, if you are a freelancer or gig worker, you’re probably a sole proprietor. If you’ve incorporated your freelance business, then you’re not considered a sole proprietor, and your filing process will differ. For help identifying your gig worker status, consult a tax professional as soon as possible.
Sole proprietors can think of their Form 1099 like a Form W-2, which an employer would send you if you worked in a traditional role. You’ll take the information from your Form 1099 and report all your taxable income and expenses on Schedule C of your Form 1040.
The process to complete Schedule C is straightforward and relatively easy to follow. Still, you’ll want to make sure you can provide receipts and forms to back up any amounts you’re claiming, including deductible expenses. Consider investing in an electronic service that compiles, saves, and organizes all your receipts so they’re not a nightmare to sort through during tax time.
Certain states require gig workers to pay about a 15% self-employment tax on their gig economy earnings. This taxation rate consists of Social Security and Medicare taxes for gig workers. Check with a local CPA or tax professional to find out if your state requires self-employment tax payments.
For additional resources on filing taxes as a gig worker, refer to the IRS’ Manage Taxes for Your Gig Work page. Additionally, consulting a tax professional to help you navigate your personal situation is strongly recommended.