What do driving for a ride-sharing company, renting out a room through a rental service and working for a company that outsources errands and tasks have in common? These are all income-generating activities in the gig economy on which income tax will be owed. A recent survey from Fiverr found that 73% of Americans plan to do freelance work this year in some capacity. If you are one of them it’s important to be aware of your tax obligations.
As a gig economy worker, it’s your responsibility to keep track of the money you make and report it on your tax return. Sounds simple enough, doesn’t it? However, it can get complex since you may have received income from various sources and through various payment apps such as Venmo or PayPal. These payments can be difficult to track unless you make a concerted effort and failure to do so can result in penalties and late payment fees unless you are aware of your tax obligations.
The following summary will help you understand your freelance tax obligations and how to file your freelance taxes.
Income you receive from a gig economy activity is generally taxable even if you don’t receive a Form 1099-MISC, Form 1099-K, W-2 or other income statement. On the other hand, your business expenses may be deductible, depending on tax limits and rules. All income you earn needs to be reported. This includes part-time, temporary, or side work paid in the form of cash, property, goods, or virtual currency. You may also be required to make quarterly estimated income tax payments and pay self-employment tax.
When working in the gig economy, it is imperative that your taxes are correctly classified. It is also critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. You can use the worker classification page on IRS.gov to determine how they should be classified.
As an independent contractor, you may be able to deduct business expenses, depending on tax limits and rules. It is important to keep records of all business expenses in case they qualify for a deduction.
Gig workers and independent contractors should also pay taxes throughout the year so they can avoid owing money when they file. Typically, an employer will withhold income taxes from their employees’ pay to help cover income taxes their employees owe.
Gig economy workers, who are not considered employees, have two ways to cover their income taxes:
- Submit a new Form W-4 to their employer to have more income taxes withheld from their paycheck
- Make quarterly estimated tax payments to help pay their income taxes throughout the year, including self-employment tax
If you are ever unsure about your responsibilities as a self-employed person or gig-worker, make sure you check out the IRS website to stay on top of all your tax obligations so you aren’t paying for it come tax time each year.