The gig economy has been growing rapidly, driven in part by a change in how people work and partly by an increased desire for freedom, flexibility, and a reasonable work/life balance. Even if you work a traditional 9-to-5 job, chances are good you have considered taking on a side hustle or two.
If this is the year you took the plunge, there are a few things you need to know about tax time. Filing taxes is always a pain, but for gig workers, the filing process can be especially complicated. Here are some key things you need to know if this is your first foray into the gig economy.
The Companies You Worked For Should (But May Not) Send You an Accounting
When you work for a traditional employer, the company must supply you with a W2 form, usually by the end of January or beginning of February. Once you get that form, you simply plug in the numbers, including your total wages and the amount of tax withheld throughout the year.
Things are much more complicated for members of the gig economy and others who are self-employed. For those workers, keeping track of payments, expenses, and the like is vitally important.
If this is your first year working in the gig economy, you should not simply assume that the people and companies you worked for will send you a detailed accounting at the start of the new year. Some of the companies you worked for may do so, sending out a form called the 1099-MISC, but even if you do not receive such a form, you are still required to report your earnings and pay the taxes due.
You Will Have to Pay Self-Employment Taxes
One of the less pleasant aspects of life in the gig economy is that gig workers are subject to the self-employment tax. Even if you do not consider yourself self-employed, the IRS certainly does, and they will require you to make those payments.
When you work for someone else, your employer pays half of the Social Security and Medicare taxes assigned to you, a benefit the self-employed and gig workers do not enjoy. The self-employment tax includes the other half of the Social Security and Medicare levies, and you must factor those amounts into your tax-filing calculations.
Making Quarterly Tax Payments May Be Required
Given that you will be on the hook for self-employment taxes, there is a good chance you will need to make advance tax payments along the way. If you wait until you file your return and find that you owe a lot of money, the IRS might tack on penalties and interest, making your tax filing experience that much worse.
Not every gig worker will be required to make quarterly advance payments, and no two situations are the same. If you just worked an occasional gig here or there, you may be able to escape those four-times-a-year payments. A good rule of thumb is to make quarterly payments if you expect to owe the IRS $1,000 or more when you file your return. If you pay too much in quarterly payments, you’ll just get any surplus money back as a refund.
It’s Important to Track All Your Expenses
The amounts reported to the IRS are gross amounts, but those gig economy payments may not reflect the whole picture. You may earn $1,000 driving for a ride-share service, but you must put gas in your car and pay for any necessary repairs.
That’s why it is so important to keep careful records and record every expense you incur as part of your gig work. The more documentation you can provide, the easier it will be to justify deductions the IRS might later question.
You May Want to Let a Pro File Your Taxes This Year
No doubt being self-employed, even part-time, will complicate your taxes. From keeping track of all those forms to making sure that all your deductions will pass IRS muster, there are many things to consider and many moving parts to keep in line.
Even if you are normally a DIY tax filer, it may make sense to have a professional complete your return, at least for the first year of your self-employment journey. As you learn the ropes and get used to the process (and have your previous year’s professoinally prepared tax return as a guide), you may feel comfortable taking the reins again.
Working in the gig economy can be great. You get to set your own hours. You can work around your normal schedule without putting your career at risk. You can earn extra money on your own terms and learn new skills.
In the end, however, there is no such thing as a free lunch. As a new member of the gig economy, you will quickly learn about the not-so-pleasant aspects of your endeavors — including settling up with the tax man. The information above can help you file your taxes correctly so that you can avoid any avoidable entanglements with the IRS.