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If you became a gig worker during the pandemic, beware: Your taxes just got more complicated.
Gig work — Uber driving, Instacart shopping, Amazon Flex delivery and so on — is on-demand, freelance work that’s typically taxed as self-employment. Instead of having an employer withhold money from your paycheck, you’re an independent contractor who is expected to pay taxes on your gig income as you earn it. You’ll also owe a larger share of your pay to Social Security and Medicare taxes.
On the plus side, you may have more opportunities to deduct your expenses and save for retirement than you do as a W-2 employee.
Self-employment taxes are a mystery to many
About half of U.S. adults say they don’t have a good understanding of the tax implications of freelance or gig work, according to a recent NerdWallet survey. Yet this type of work was a growing part of the U.S. economy even before the pandemic upended people’s work lives.
A survey last summer by Upwork, a freelance job platform, found 59 million Americans — or 36% of the U.S. labor force — had freelanced in the previous 12 months. But COVID-19 lockdowns led to big changes in the composition of the freelance fleet. Millions had to quit during the pandemic, often because of lack of work or fear of contracting the virus. At the same time, massive unemployment and a surge in demand for home delivery led millions of others to seek out freelance work for the first time.
Gig work tax basics
Regular employees get W-2s in January from their employers showing how much they earned the previous year and how much was withheld in taxes. The self-employed, by contrast, may get tax forms known as 1099s showing how much a company paid them. Even if you don’t get a 1099, though, you’re expected to file a tax return and report all your self-employment income if your net earnings are $400 or more. Net earnings is basically the income you earn from your self-employment minus allowed deductions.
You may be required to send out 1099s if you paid $600 or more to any person or company as part of your business. The deadline to file those was Feb. 1.
You’re also going to owe self-employment tax. Employees typically pay 6.2% of their income in Social Security taxes and 1.45% in Medicare taxes, while their employers pay an equal amount. But if you’re your own employer, you typically pay both halves of those taxes: 12.4% to Social Security and 2.9% to Medicare, for a total of 15.3%.
What you can deduct
Internet, phone service, transportation, health insurance, a home office — all these and more are potentially deductible, at least in part, if they are “ordinary and necessary” parts of running your business.
But you can go too far. You may need cell service for the app-based driving or delivery work you do, for example, but you can’t deduct 100% of the cost — only the portion that’s related to your gig work. If 25% of your phone use can be attributed to your gig, then you can deduct 25% of the cost.
The 15.3% self-employment tax mentioned above is also deductible. You can deduct half of what you pay in self-employment tax when figuring your income taxes.
You also can deduct retirement plan contributions. While it’s generally too late to set up a solo 401(k) or a SIMPLE for 2020, you can open and contribute to a SEP IRA until your tax filing due date: April 15 plus extensions.
Avoiding penalties
You’ll typically avoid underpayment penalties if you end up owing the IRS less than $1,000. You’ll also be penalty-proof if your 2020 tax payments are at least 90% of what you ultimately owe for the year, or 100% of what you paid in 2019, whichever is smaller. (But if your adjusted gross income in 2019 was more than $150,000 — or $75,000 for married filing a separate return — that threshold rises to 110% of what you paid in 2019.)
Don’t let the fear of owing money keep you from filing, however. The IRS has payment plans, and its penalties for failing to pay on time are far less than those for failing to file a return on time.
Tax software can guide you through the process, but consider hiring a tax professional to help you if this is the first time you’ve filed as self-employed. There are enough gray areas and complications to gig work taxation that having help from a pro can pay for itself.
This article was written by NerdWallet and was originally published by the Associated Press.
FAQs
Instead of having an employer withhold money from your paycheck, you're an independent contractor who is expected to pay taxes on your gig income as you earn it. You'll also owe a larger share of your pay to Social Security and Medicare taxes.
How do gig workers deal with paying taxes? ›
Self-Managed Tax Withholding
Your gig income is also subject to self-employment tax, which includes Social Security and Medicare taxes. While traditional Form W-2 employees have these taxes automatically withheld from their paychecks, in the gig economy, the onus of tax withholding falls squarely on your shoulders.
Do gig workers get audited by IRS? ›
And small businesses have extra tax rules – and potentially more IRS audits and notices. This is true whether your gig economy job is your primary source of income or your side hustle. It's important to know that filing taxes as an independent contractor can get complicated.
How do you calculate taxes on gig work? ›
Self-employment tax is applied to 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting your business expenses from the gross income of your gig or other self-employment income.
How does the IRS know if you have a side hustle? ›
If you get paid electronically for a side hustle, small business or selling things online, you may need to pay taxes. Payment apps and online marketplaces might issue a Form 1099-K, informing you and the IRS of how much money you got for selling things or providing a service.
What is proof of income for gig workers? ›
A profit and loss statement, also known as an income statement, is a document that shows your business's revenue, expenses, and net income. You can use a profit and loss statement to show your income if you're a gig worker who operates as a sole proprietor.
Can gig workers claim mileage on taxes? ›
Common Tax Deductions for Gig Workers
If you're a gig driver, this is your biggest expense, and you need to take full advantage of it. The IRS gives you two choices when deducting this expense. You can either use the IRS standard mileage rate, which for 2023 is 65.5 cents/per mile or your actual expenses.
What income is most likely to get audited? ›
The taxpayers most likely to be audited are those with annual incomes exceeding $10 million — about 2.4% of those returns were audited in 2020. But the second most likely group to get audited are low- and moderate-income taxpayers who claim the Earned Income Tax Credit, or EITC.
What happens if I don't report my side hustle income? ›
According to TurboTax, the penalty for substantially underreporting income is 20% of the amount of tax you've underpaid. So, let's say you earn $20,000 in side hustle income but try to keep that from the IRS. If you fall into the 22% tax bracket, it means you were supposed to pay the IRS $4,400 on that $20,000.
Do I need an EIN for gig work? ›
If you are a sole proprietor running a side hustle and excluded from the IRS list, you aren't required to get an EIN or even register your business with the government. The rules change as you look at business entities such as corporations, but as a general rule, most sole proprietors are not required to have an EIN.
If you itemize, you can deduct these expenses:
- Bad debts.
- Canceled debt on home.
- Capital losses.
- Donations to charity.
- Gains from sale of your home.
- Gambling losses.
- Home mortgage interest.
- Income, sales, real estate and personal property taxes.
Q. What percentage do you pay in taxes on a 1099 form? Any 1099 income above $400 is taxed at a 15.3% fixed rate by the IRS. This includes 12.4% for Social Security and 2.9% for Medicare.
Can gig workers deduct meals on taxes? ›
You can also deduct up to 50% of your meals while traveling for business. Note: For tax years 2021 and 2022, meals were temporarily 100% deductible. As of 2023, the deductible portion has reverted to 50%.
What qualifies as a hobby expense for tax purposes? ›
For tax purposes, a "hobby" is an activity you engage in primarily for a purpose other than to make a profit. The IRS commonly classifies inherently "fun" activities like creating art, photography, crafts, writing, antique or stamp collecting, or training and showing dogs or horses as hobbies.
How much money can you make before a hobby becomes a business? ›
If you earn more than $400 in a calendar year from your hobby, you should file a return and report it as self-employed income on your taxes. According to the IRS rules, you must file Schedule SE and pay self-employment tax if your net earnings from your activity are $400 or more in a single calendar year.
What happens if I underreport my income? ›
When it's determined that you've willfully underreported your income, it can quickly become an accusation of willful tax evasion. Willful tax evasion, such as underreporting income or filing a false tax return can be penalized with criminal charges – typically a felony tax evasion charge and sometimes even jail time.
Why do gig economy workers need to pay estimated quarterly taxes? ›
Estimated payments are payments that gig workers must make four times a year (each quarter) to cover the estimated taxes on the income they receive. Gig positions are unlike full-time employer positions because they don't have an employer withholding income tax, Social Security and Medicare taxes.
How do taxes work on freelance work? ›
As an independent worker, you must pay federal and possibly state income taxes at a rate based on your total annual income. You also owe Social Security taxes (the employee's share is typically 6.2% of gross pay) and Medicare taxes (typically 1.45% of gross pay).
How to file taxes if you get paid under the table? ›
Is It Necessary to Report Income From Under the Table Jobs? The short answer is yes. Depending on the source of your under-the-table income, you will be required to file Form 1040. You may also need to file Form 4137 for reporting cash income from odd jobs, such as tips.
