The COVID-19 pandemic has seen an expansion of the so-called “gig economy,” also known as the sharing or access economy. According to the Pew Research Center, 16% of U.S. workers have ever earned money through an online gig platform, such as Uber, DoorDash or Instacart.
The opportunity to be your own boss or simply to make some extra cash might sound enticing, but it comes with more complicated tax obligations than you typically have as a traditional employee who receives a W-2 form. It’s easy to slip and end up on the hook for unexpected taxes — as well as interest and penalties — especially when you’re new to gig work.
Here are answers to some frequently asked questions (FAQs) to help you stay in compliance with the tax rules and avoid extra bills from the IRS.
Are You Part of the Gig Economy?
Gig work has become such a force in the U.S. economy that the IRS now has a dedicated “Gig Economy Tax Center” on its website. The IRS generally defines gig work as on-demand activity you do to earn income, often through a digital platform (an app or website). Examples include:
- Driving your car to make deliveries or transport passengers (for example, Grubhub or Lyft),
- Renting out property or part of it (for example, Airbnb),
- Running errands or completing tasks (for example, TaskRabbit),
- Selling goods online (for example, Etsy),
- Renting equipment (for example, Rent My Equipment), and
- Renting recreational vehicles (for example, Outdoorsy).
The IRS also considers providing professional or creative services and other temporary, on-demand and freelance work to qualify as gig work, assuming you’re working as an independent contractor. The IRS resource center is tucked within its resources for small businesses and self-employed individuals. You may consider your side hustle small potatoes — but the IRS considers it a legitimate business.
Do You Need to Pay Taxes on Your Earnings?
Under IRS rules, you must file a tax return if you have net earnings (meaning earnings minus allowable deductions) of $400 or more from gig work, whether paid in cash, property, goods or cryptocurrency. You must report the income even if you don’t receive a Form 1099. And that’s just one of the applicable tax rules many gig workers learn about the hard way, after failing to comply and receiving a notice from the IRS.
Important: Beginning in 2022, a change in the law requires payment networks, such as Venmo and PayPal, to report to the IRS when a user receives more than $600 in gross payments. Previously, this reporting was required only when more than 200 transactions resulted in gross payments that exceeded $20,000.
Are You Required to Make Estimated Tax Payments?
You may be accustomed to paying any taxes you owe on April 15, whether you file your return at that time or request an extension. But self-employed individuals who expect to owe $1,000 or more when their tax returns are filed must make quarterly estimated tax payments, usually based on the prior year’s income.
For the 2022 tax year, the payment schedule is generally as follows:
- April 18, 2022, for income received from January 1, 2022, through March 31, 2022,
- June 15, 2022, for income received from April 1, 2022, through May 31, 2022,
- September 15, 2022, for income received from June 1, 2022, through Aug. 31, 2022, and
- January 17, 2023, for income received from September 1, 2022, through December 31, 2022.
You may incur penalties and interest if your payments are late or insufficient, even if you’re due a refund when you file your annual tax return.
Gig workers who also work as an employee have an alternative to paying estimated taxes. Instead, they can increase the withholding amount on the paychecks they receive from their employers as employees.
Will You Owe Self-Employment Taxes?
Your taxes include a 15.3% self-employment tax that covers Social Security (12.4%) and Medicare (2.9%) taxes, on top of your income tax and, if applicable, alternative minimum tax (AMT). In contrast, when you work as an employee, you’re only charged half of the self-employment tax amount; your employer pays the remainder.
Self-employed individuals must shoulder the entire amount. You are, however, allowed to deduct half of your self-employment tax.
Can I Deduct My Expenses?
As a business, you also can deduct a variety of eligible “ordinary and necessary” business expenses to offset your income. Examples potentially include:
- Business vehicle costs,
- Phone and internet expenses,
- Home office expenses (such as mortgage interest, insurance, utilities, repairs and depreciation), and
- Certain travel and meal expenses.
Typically, as a cash-basis taxpayer, you can deduct eligible expenses in the tax year you pay them. Many of the expenses you incur in the gig economy (for example, the costs of phones, cars, gas and internet service) may have both business and personal components. When that’s the case, you must allocate the costs between the two types of use and then deduct the amounts attributed to business purposes. The rules can be complicated and require close tracking of expenses and use.
Get It Right
Careful recordkeeping is essential if you perform gig work. You should collect your records and receipts throughout the year so you can accurately track your income and deductible expenses.
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