The Gig Worker’s Guide to Filing Taxes
Gig work is nothing new. The concept has been around for more than a hundred years! But these days, it's more prevalent than ever. According to Statistica, more than 73 million Americans work freelance jobs in the United States alone. The pandemic undoubtedly made the gig economy more compelling, but many attribute accessible technology and a dramatic shift in career goals as big factors for the rise of independent contractors.
Whether you're doing a "side hustle" to make extra cash or you work exclusively as a freelancer, you're not free from taxes! There are many benefits to being a gig worker, but the tax implications are more complex than most realize. Fortunately, we here at Gerstein's Tax Service are here to help.
Here's all you need to know about filing your taxes as a part of the growing gig economy.
The Difference Between an Employee and Contractor
Understanding whether you're an employee or a gig worker sounds simple, but this distinction is important. Work may feel like work, no matter how you do it. But in the eyes of the IRS, there's a big difference.
The term "gig worker" is one of many monikers you might hear. It's the same as "freelancer" and "independent contractor." You might even call yourself a "sole proprietor" when doing your taxes. These terms all refer to people who work independently and not as an employee of a company.
Ultimately, that's the major difference everything boils down to in employee versus contractor classification.
If you're an employee, you have a standard job and work as part of a company. Your employer pays you a salary or hourly rate and may provide additional benefits as part of your compensation package. Meanwhile, contractors don't work for a company at all. They work for themselves, completing projects and services for another entity.
The distinction matters because employees and contractors have different tax implications.
As an employee, your company withholds some of your net pay and covers part of your tax obligation. As a contractor, you're responsible for all of it. You must pay income and self-employment taxes.
More on that later.
Employee classification can get hazy, but there's a "facts and circumstances" test to understand your situation better. You must look at three factors to determine if you're a gig worker or an employee.
Employment Relationship with a Business
You can work with businesses as an independent contractor. However, they're not your employers. Instead, they're your clients or customers.
Employees are part of the business. They receive employee benefits like health care coverage, retirement, etc. As an employee, your work also contributes to the company's bottom line, and you have employment indefinitely until you and your employer separate.
Those factors don't apply to independent contractors. Gig workers don't get benefits. Furthermore, the work contract is typically over a defined period
Financial Control
Financial control refers to the exchange of money for your work and your investment in the business.
Employees get paid hourly or annually, even if the job runs on commissions or tips. They also don't invest in work equipment, have a claim to profits and losses or get reimbursed for expenses.
Contractors usually get paid a flat rate per job. Think of an Uber driver. They get paid for every ride they provide. Contractors are also responsible for buying their equipment, directly controlling profits and losses from their work and requesting reimbursement for expenses.
Work Behavior
Finally, we have the factor of work control. Who controls your work is an important element to consider.
If you're an employee of a company, you're a human resource for the organization. The business will invest in your ongoing development and evaluate how you do the work. They'll also dictate how, when and where you perform your job.
Independent contractors have ultimate freedom. Clients can only evaluate the end product and have no say in how you do it. As a gig worker, it's entirely up to you!
Common Tax Deductions
It can be overwhelming doing your taxes as a contractor. Many gig workers experience sticker shock when they first see how much they owe!
Fortunately, freelancers have ways to reduce their taxable income. Unlike employees, gig workers can deduct legitimate business expenses. Here's where having a tax professional from Gerstein's Tax Service comes in handy. Knowing what's available is half the battle. There are many possible deductions, but many sole proprietors aren't aware of what they can claim.
Every situation is different, but here's a quick breakdown of the most common write-offs gig workers can often claim.
Mileage or Car Expenses
Does your work involve driving? If so, you can claim deductions for every mile you drive!
This deduction is one of the most common for those who drive for ridesharing platforms. But it goes beyond that. You can claim it if you're a contract delivery driver, a freelance jewelry maker traveling to trade shows and more!
In 2023, the IRS-set mileage rate is $0.655 per mile you drive for your business. That's 65.5 cents for every mile. Considering how much fuel costs these days, it's a substantial deduction.
It doesn't end there.
You can also do write-offs for auto expenses related to the vehicle you use for your work. Possible expenses you can deduct include:
Vehicle depreciation
Lease payments
Oil-changes
Tune-ups
Tire rotations
Registration fees
Insurance
Major and minor repairs
Keep in mind that mileage and auto expense deductions must be legitimate. That means you can only count what you spend on business-related activities only.
Health Insurance
One downside of being an independent contractor is that you can't get employee benefits like employer-sponsored health insurance. But the good news is that you can deduct your health insurance premiums. You want to take advantage of this deduction when filing your taxes!
Purchasing health insurance through the marketplace can be pricey. As a self-employed individual, you can write off as much as 100 percent of your premiums! Furthermore, you can include the premiums of your spouse, dependents and non-dependents under 27.
Qualified Business Income
Sometimes, you can deduct up to 20 percent of qualified business income. This deduction typically applies to pass-through entities like partnerships and S-Corporations. But it also applies to unincorporated entities, such as sole proprietorships. As a gig worker, that includes you!
There are some caveats. First, it applies to 20 percent of your net income. Secondly, you can only claim the deduction if your taxable income is under the set limits. In 2023, the limits are $182,100 for single filers and $364,200 for joint filers. You also have to file separate forms (8995 or 8995-A).
How to Document Expenses
There's tons of potential to reduce your tax obligations with deductions. However, you must start keeping accurate records from the jump. Begin documenting your expenses the moment you enter the gig work fray!
As you can imagine, there's room to fudge the truth when claiming deductions. The burden of proving those expenses falls onto the taxpayer. If your write-offs don't make sense compared to your income, there's a real chance that the IRS will demand documentation.
Do yourself a favor and record every mile driven and every dollar spent on your contractor work. Consider opening a separate bank account that you can use exclusively for your business. You can also utilize spreadsheets or one of many expense-tracking apps available.
Documentation will make things easier come tax season. Plus, they can come in handy if your deductions raise any red flags with the IRS.
You MIght Have to Make Quarterly Estimated Payments
Earlier, we mentioned that one big distinction between employees and contractors is how you manage taxes. When you work as an employee for a company, you have tax withholding. Your employer withholds some of your gross pay and covers part of your tax obligations.
Gig workers don't have that luxury. As a contractor, you take home 100 percent of the money you make providing a product or service. So, how do you cover your tax duties?
Cue estimated tax payments.
Estimated tax payments are due quarterly on the following dates:
April 15th (income earned January through March)
June 15th (income earned April and May)
September 15th (income earned June through August)
January 15th (income earned September through December)
You must file form 1040-ES as you make your estimated payment.
If you don't pay estimated quarterly taxes, you'll encounter several issues. First, you may be penalized for underpayment. You may have to pay a small percentage of what you should have sent to the IRS. Secondly, you'll have an enormous tax bill!
Paying quarterly taxes can seem burdensome, especially when your friends who work normal jobs don't have to. But it's far better to split your taxes into four payments throughout the year than scrambling to pay the entire lump sum upfront when April rolls around.
Self-Employment Tax for Social Security and Medicare
How much you owe in taxes, whether as a lump sum or quarter payments, may seem higher than you expect, given your tax bracket. What gives?
It all comes down to self-employment tax. You're not just paying personal income tax. You also have to pay for Social Security and Medicare!
When you're an employee, your company pays half of the Social Security and Medicare taxes. But as a gig worker, you're on your own and don't have that luxury! As a result, you're responsible for paying both your share and what would otherwise be an employer's share.
The total amount you must pay in self-employment tax equals 15.3 percent of your net income
Saving for Retirement
Another thing to consider is how you'll save for retirement.
One of the many benefits companies offer when they bring employees on is an employer-sponsored 401 (k) retirement account. But you guessed it: You don't have that perk as a gig worker. It's up to you to put money away for retirement.
Fortunately, there are many great options available. For most self-employed people, a Roth IRA is the way to go. These tax-advantaged retirement plans can help you save for the future. You're free to contribute a total of $6,500 ($7,500 if you're over 50 years old) annually. These accounts are available if you make less than $153,000 as a single filer or $228,000 as a joint filer.
If you're lucky enough to make more than those limits, you can explore other options like a traditional IRA or SEP IRA. Either way, it's wise to look into those accounts and start saving.
Understanding the Details of Required Forms
Let's talk forms!
Filing your taxes is difficult enough when you're an employee. But typically, you work from a single document: a W-2. The Wage and Tax statement details how much you earned from an employer, how much taxes they withheld, etc.
Of course, you don't have W-2s as a gig worker. Therefore, you'll use different documents and go through a filing process that feels different from what you might have experienced previously. There are a few core forms you'll need.
Form 1099-NEC
The most important document you'll need is Form 1099-NEC. The IRS first introduced this form in 2020. Before that, it was called the 1099-MISC. It's largely the same and allows the clients you provided contractor service to report how much they paid you.
"NEC" stands for "Non-Employee Compensation."
As an independent contractor, you're not an employee. So any company or client you work with has to report the compensation they provide. Your clients will file Form 1099-NEC, sending Copy A to the IRS and Copy B to you.
Businesses only have to file a 1099-NEC if they paid you more than $600 during the tax year. You might not get it if you didn't earn that much from them. However, you still have to report those earnings and pay applicable taxes.
These forms are simple, including personal information and the amount of non-employee compensation provided.
If you have a long list of clients you worked with during the tax year, you may receive numerous 1099-NEC forms. Please keep track of them all, as you need them to report your income.
Form 1099-K
Next up, we have Form 1099-K. The official name is "Form 1099-K: Payment Card and Third Party Network Transactions." As the name implies, the form is to report payments from online platforms or payment processors.
There are countless ways for clients to pay you. You may use a credit card processor to take payment from customers and clients on the go. That's a common technique for selling goods or providing in-demand services. Alternatively, you may use platforms like PayPal, Payoneer, Venmo, etc.
The point of the 1099-K is to provide a record of your transactions.
In 2021, lawmakers passed a new tax rule that changed the threshold for filing a 1099-K. It used to be that platforms had to send this form if you performed 200 transactions and made at least $20,000. With the new change, that threshold goes down to $600 per platform.
However, the IRS announced a delay in implementing the change. It doesn't apply to the 2022 tax year but will apply to 2023.
Schedule C
A Schedule C is an important form for gig workers. It's called "Schedule C: Profit or Loss from Business (Sole Proprietorship). With this form, you can report the money you made and lost as an independent contractor. This form also applies to businesses. But as a gig worker, you're a business of one. Therefore, you must file one with your Form 1040.
The form includes additional information about business activity. In addition to gathering data about what you do, it's to report the costs of goods sold, business expenses and more. You also use it to provide gross receipts or sales. If you have any income not reported through a 1099-NEC, you would include it here.
The purpose of a Schedule C is to determine how much of your income is subject to taxes.
Contact Gerstein’s Tax Service for a Consultation
Are you feeling overwhelmed yet?
Being a gig worker can be an amazing experience. It's your chance to take control of your career, earn money on your terms and explore new ventures. But despite all the good that comes with being a contractor, doing your taxes can be a nightmare!
Don't let a lack of knowledge get you into trouble with the IRS. Taxes for gig workers can be complex, but help is available.
At Gerstein's Tax Service, we can help you file your taxes right. We're a Brooklyn-based, family-owned business with over four decades of experience preparing taxes. Whether you work as a contractor full-time or make extra money on the side, we're more than ready to help you navigate tax season.
Call us today to schedule your consultation and put the stress of taxes as a gig worker behind you!