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How Gig Economy Workers Pay Taxes

How Gig Economy Workers Pay Taxes
Ines Zemelman, EA
04 October 2021

Regardless of how you coin it—a side hustle, freelance work, gig work, etc.—the fact is if you earn an income of $400 or more in a single year, you’re obligated to pay federal taxes for gig workers on those earnings as well as contributions to Social Security and Medicare.

Trying to determine what you owe can be quite complicated especially if you have just started doing gig work, if you haven’t been religiously documenting your earnings or haven’t set any money aside to cover your tax bill for the year.

In this article, we’ll discuss the various nuances of gig workers and taxes and provide answers to important questions such as “do gig economy workers pay taxes?” “how do gig economy workers pay taxes?” and so much more. We’ll also offer you tips from the Internal Revenue Service (IRS) that can assist you in completing your taxes if you’re a gig worker.

To start, let’s first find out what gig work and the gig economy is.

What Is Gig Work?

According to data from the research firm, Statista, an estimated 57 million people do gig work each year in the United States. The reason why there’s a lot of Americans that do freelance work is that there are plenty of jobs that fit this description. Lots of gig opportunities can be had using smartphone apps or websites that connect you to people that want to either employ your services or buy your goods. However, short-term work that you find on your own may also be tagged as gig work. These jobs include—but certainly are not limited to—the following:

  • Driving people or deliveries in your car;

  • Selling products or crafts online;

  • Renting your home or other property for short-term use;

  • Using your skills and experience to provide temporary, contract or freelance work;

  • Running errands, dog walking or providing similar services for others;

  • Renting out your car or other equipment.

Tax Tips for Gig Workers

1. What Income to File for Gig Workers Tax?

If you made more than $400 in 2020 through gig work, then you will need to file Schedule SE, aside from Form 1040 or Form 1040 SR. The “SE” means “self-employed.” This is the document that you will utilize to determine just how much money you earned working for yourself that must be taxed.

Also, you have to take note that the tax return for being self-employed may seem a lot compared to jobs wherein you worked for an employer. This is because when you have an employer, you and the company split the amount that you are obligated to contribute to Social Security and Medicare.

However, when you are self-employed, you have to cover the full 12.4% for Social Security and 2.9% for Medicare, but you can also deduct the half that would be paid by an employer. If you have gig work, you can plan ahead to elude a huge self-employed tax bill at year’s end.

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  • You can pay quarterly taxes throughout the year using Form 1040-ES (Estimated Taxes for Individuals) or Form 1040-ES (NR) (U.S. Estimated Tax for Nonresident Alien Individuals). Estimated taxes are due on four dates: April 15, June 15, Sept. 15 and Jan. 15.
  • If you have an employer and also have a freelance job on the side, you can adjust your withholding on your W-4 form with your employer so that it also withholds taxes on your self-employment income.
  • Make sure to document all the expenses from your self-employed/gig work throughout the year. These documents will come in handy for valuable deductions come tax season.

It is absolutely crucial that business owners properly determine whether individuals providing services are employees or independent contractors as the latter can deduct business expenses, depending on tax limits and regulations. That being said, it is vital for taxpayers to document their business expenses. If you want to make certain of what your classification is, you can check out the worker classification page on IRS.gov.

2. How Much and How to Pay Taxes?

You are obligated to report income earned from a gig or freelance work on a tax return, regardless if the income is:

  • From part-time, temporary or side work

  • Not reported on an information return form—like a Form 1099-K, 1099-MISC, W-2 or other income statement

  • Paid in any form, including cash, property, goods, or virtual currency

If you are making money for freelance work as an independent contractor, you may also have to pay quarterly estimated taxes. It is strongly recommended that you pay your taxes on time to avoid incurring penalties.

So, when do you have to pay? Estimated tax payments are due four times a year:

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  • April 15 for payment period January 1–March 31

  •  June 15 for payment period April 1–May 31

  • September 15 for payment period June 1–August 31

  • January 15 for payment period September 1–December 31 

Note: If these due dates fall on a Saturday, Sunday or legal holiday, the payments are due the next business day.

With regards to how to pay, you can pay online or through mail or phone. You can also calculate an estimate using one of these forms: 

  • Form 1040-ES, Estimated Taxes for Individuals

  • Form 1040-ES (NR), U.S. Estimated Tax for Nonresident Alien Individuals

3. Tax Deductions

You can deduct expenses that are related to your self-employed work but only if you have properly documented these. For example, you can take a deduction for your mobile phone but only for the part of the bill that relates to your work—not necessarily the entire amount. Another example is you can also take a deduction if you work from an office inside your residence. However, it has to be a space that is completely dedicated to your self-employed work. Whatever the case may be, it is important that you keep backup receipts and records in case the IRS asks for proof of the expenses that you listed down.

One important deduction that you must make sure to take is half of the Social Security and Medicare taxes that are typically being shouldered by your employer. That deduction is worth roughly 7.65% of your pretax income if you earned less than $137,700 in 2020. You may also be able to claim a deduction for your health insurance costs. 

4. Penalties from the IRS

If your net earning from self-employment is more than $400, you will have to file a tax return by the due date or else, there will be a penalty for failure to file. You may also have to pay an estimated tax in the current year, which depends on how much tax was withheld on your gig earnings. If there is a shortfall in taxes on the date of filing tax returns, you are liable to a penalty for failure to file taxes. Also, if you do not pay the estimated tax, there is a provision of levy of the estimated tax penalty.

Ines Zemelman, EA
Founder of TFX