Does your pet sitter need a 1099 form? What percentage of your Etsy sales will go to taxes? These and similar questions are becoming increasingly common with the rise of the “gig economy.” The gig economy refers to a growing workforce who earn income through temporary non-salaried or freelance jobs. This includes workers on digital platforms like Uber, DoorDash, TaskRabbit, and similar sites, as well as jobs that predate the internet like pet sitting or home repairs. In recent years, the number of gig workers in the U.S. has skyrocketed. The IRS estimates that the number of taxpayers who earned income from gig work tripled between 2017 and 2021. A survey conducted in 2022 suggests that there are currently 68 million “independent contractors” in the U.S. Businesses are also looking to make the most of the gig economy—about a third of the small-to-midsize companies surveyed are looking to hire part-time or contract workers.
Even those who feel confident about how to report W-2 earnings may find themselves in the dark when it comes to submitting tax returns for gig work. Those who work multiple jobs and engage in entrepreneurial efforts will find it especially helpful to work with a Certified Tax Planner to stay on top of tax requirements and plan ahead for how to reduce their tax bill. Read on for our overview of tax planning best practices for gig workers.
HOW IS GIG WORK TAXED?
A key to profitability in your gig work is to stay ahead of tax obligations. Learning about tax requirements late in the game could result in back-tax penalties and interest that cut into your take-home pay.
The first question to answer is whether you earn enough from gig work to file a tax return. The IRS states that anyone whose net income from self-employment or gig work is $400 or more per year needs to report their earnings. Keep in mind that cash payments count, too. The IRS is aware that many small businesses deal in cash, and in the event of an audit, you will want to have these payments well-documented.
Gig workers who earn more than $600 in one year should receive a 1099 tax form, such as the 1099-MISC (“Miscellaneous Information”) or the 1099-NEC (“Nonemployee Compensation”). This threshold now also applies to workers who are paid through third-party platforms like Venmo and PayPal or who make sales on e-commerce sites like eBay and Etsy. Starting in 2023, if your third-party payments exceed $600 in one year, these transactions must be reported on your tax return.
In addition to regular income tax, gig workers must pay the self-employment (SE) tax. The SE tax rate is 15.3%, which combines 12.4% for Social Security and 2.9% for Medicare. This tax subs in for the amount that would normally be withheld by an employer for Social Security and Medicare. Since employers typically split the cost of these taxes with their employees, the IRS offers self-employed workers special deductions to offset the costs.
WHEN DO GIG WORKERS NEED TO PAY TAXES?
Self-employed gig workers are required to file an annual tax return by that year’s deadline (usually April 15th). Additionally, gig workers will need to calculate and pay their estimated taxes each quarter if…
- They expect to owe at least $1,000 in tax for the year (after subtracting withholding and refundable tax credits)
- They expect their withholding and refundable tax credits to be less than the smaller of:
- 90% of the tax to be shown on their 2024 annual tax return
- 100% of the tax shown on their 2023 return
Estimated tax payments are usually due in the middle of the month after the quarter ends. For example, the 2024 deadlines are:
- January 1st – March 31st: due April 15th
- April 1st – May 31st: due June 17th
- June 1st – August 31st: due September 16th
- September 1st – December 31st: due January 15th of the following year
These deadlines can be found every year on the IRS website. The trickier part is actually estimating the amount of your quarterly taxes. Recent surveys show that gig workers experience particular worries about handling these tax payments:
- 63% were concerned they’d owe more than they estimated
- 46% worried about audits
- 40% said they wouldn’t be able to pay their taxes
Knowing how much to set aside and planning for this in advance can reduce some of this anxiety. Fortunately, the 1040-ES instruction booklet (for Estimated Tax for Individuals) has a worksheet to help with your calculations. A generally good rule of thumb is to set aside a third of your gig income to cover any taxes. Of this amount, about two-thirds will go to federal taxes and the remaining money will go toward state and local taxes. If you are uncertain, err on the side of setting aside more tax money. If you happen to overpay, you will receive an overpayment credit after you submit your annual tax return.
On the other hand, if you underpay, you will incur a penalty plus 7% interest on any delayed payments. Fortunately, the IRS does not require your calculations to be “right on the money.” Taxpayers need to pay the smaller of the two amounts mentioned above: either 90% of the tax owed for the current year or 100% of the tax shown on your return for the prior year.
LEARNING BY EXAMPLE: CALCULATING ESTIMATED TAXES
Let’s take an example of what this process might look like in real life. In June 2022, Gigi the gig worker held contract jobs as a freelance writer and bicycle courier. She buys a laptop computer for $500 to use exclusively for writing work and pays $300 for a bicycle to use exclusively for the courier gig. She also spends $40 on dinner for a source she interviews for an article.
Between June and September, Gigi writes four articles for a news website and receives $300 for each one. Three of these payments come in before September, but the fourth payment is delayed until November. Meanwhile, at her courier job, she makes an average of $180 a week, amounting to $2,160 for the quarter.
Since Gigi is aware of the best practices for tax planning, she sets aside a third of her earnings for the third quarter: $300 from the articles she received payment for (⅓ of a total $900) and $720 for her courier work (⅓ of $2,160). When the mid-September deadline comes around, Gigi pays $1,020 in taxes—$680 goes to the IRS and $340 goes to state and local taxes. She also keeps a record of the date and amount of each payment.
Gigi also keeps the receipts for the cost of the laptop computer, bicycle, and business dinner (which is only 50% deductible) and saves them for her yearly 1040 tax return when she will record these as deductions on her Schedule C form.
WHAT DO GIG WORKERS NEED TO KNOW ABOUT TAX FORMS?
In addition to their yearly 1040 form, gig workers will file a Schedule C, which reports income or loss from their business and any tax deductions. Deductions can include the costs of running a business, such as meals with clients, home-office expenses, internet bills, and vehicle depreciation for work-related travel.
Gig workers will want to familiarize themselves with the rules before claiming deductions. For instance, taxpayers can deduct only half the cost of business-related meals with clients. Keeping organized records and copies of all receipts is also essential when making business deductions.
Gig workers will also use Form 1040-ES for their quarterly estimated tax payments. The payments themselves can be submitted online, usually through direct pay from a bank account, or mailed in via check.
SUMMARY
Gig work can come with numerous benefits whether you are looking for flexibility and the option to set your own work hours or you are looking for extra cash on top of your day job to reach your financial goals or make ends meet. Those who are prepared for the tax implications of gig work stand to benefit the most. By being aware of when you are required to report gig income and setting aside sufficient funds for estimated tax payments, you can avoid unnecessary tax penalties and focus more of your energy on your side hustle.
For expert advice on tax planning for contract workers, self-employed business owners, and other partakers in the gig economy, reach out to us by visiting our home page or filling out our online form to request a Free Consultation.
