The gig economy is gearing up and if you have been a freelancer for any length of time, you are helping to drive it forward. Congratulations on your success! However, it is critical not to lose sight of the tax obligations that come with operating as an independent contractor or freelancer in the gig economy, otherwise what is now a lucrative and enjoyable business can turn into a headache and significant stressor.
To avoid this pain, you need to have your tax obligations in order. Whether your gig economy income is your side hustle or full-time income, the ideal time to start managing your freelance tax obligations is right now as you prepare to file your 2021 taxes for your freelance business.
This 2021 tax year checklist for freelance and gig economy businesses will help you simplify your tax return preparation and position yourself for success in 2022:
1) Accept the fact that all gig work is taxable. Earnings from gig economy work is taxable, regardless of whether you receive a Form 1099-NEC or not from the clients you work with. This means some gig workers will now receive an information return. This is true even if the work is full-time, part-time or if an individual is paid in cash.
2) Claim all your business income. This includes any payments received through Venmo, PayPal, Facebook, and other peer-to-peer platforms. For 2022, the reporting requirement for issuance of Form 1099-K for payment cards and third-party network transactions has changed for payments received in 2022 to totals exceeding $600, regardless of the total number of transactions.
3) Pay the right amount of taxes throughout the year. If you are solely self-employed, then it is up to you to stay on top of quarterly estimated tax payments. Remember, even as a part-time gig worker, you are required to make quarterly estimated income tax payments and pay Social Security and Medicare taxes. Which brings us to the next point…
4) Make sure your clients classify use the correct worker classification. While providing gig economy services, it is important that you are correctly classified by your clients. This means that any business you work for must determine whether you are providing services as an employee or independent contractor. This is a critical distinction because the tax reporting and payment obligations are quite different. A breakdown of how to tell if you are classified correctly can be found here.
5) Keep your tax and business records updated. As an independent contractor, you may be able to deduct business expenses, such as home office space, supplies, equipment, mileage, and more, however it is critical to keep records of these deductions so you can file your taxes accurately and in case the IRS ever audits you.
7) Get some good advice. In addition to doing your own due diligence using the IRS website to learn more about your freelance business and gig economy tax responsibilities, make sure you reach out early and often to a CPA or tax preparer if you have questions or need assistance filing your gig economy taxes. The expertise and current tax knowledge these professionals have may help you save considerable time and money while also ensuring that you stay in compliance with your obligations as a business owner.
The tax filing window is opening January 24, 2022, if you make a move now to get your tax documentation and seek professional help if needed, you’ll be all set to file early to give yourself the best possible chance of expediting any refund you may be owed and eliminating the chance that you do not meet the deadline or documentation requirements for tax year 2021.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting, and business articles for freelancers on his website, http://www.cpaforfreelancers.com, which also features a free newsletter, blog, and comprehensive freelance tax guide.