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The Ultimate Guide to Taxes for Gig Workers

The Ultimate Guide to Taxes for Gig Workers
Ines Zemelman, EA
30 August 2021

Side gigs have exploded in popularity in recent years, and for good reason. People use the income from their side gigs to pay the bills or build an emergency fund. And with large companies such as Amazon, DoorDash, and Uber always looking for workers, anyone can sign up and work immediately. The best part: you don't have to quit your day job.

It's important to note that you need to pay federal tax on all income, including from your side work. And if you do gig work full-time, you might be on the hook for Medicare and Social Security as well.

Figuring out your tax situation can be tricky, especially if you're new to freelancing or side gigs. Here's a quick guide to taxes for gig workers to get you started.

What Is Gig Income?

While there's no single definition for gig work, it's widely understood to be short-term, contracted employment that doesn't have an employer-employee relationship. Gig workers choose the jobs they want to work on. According to Statista, over 57 million Americans do a gig or freelance work.

A gig worker works in a temporary or part-time position as an independent contractor, whether for multiple clients or a single company. For instance, a person who drives for Uber, a freelance accountant, and an artist that accepts online commissions are all considered gig workers.

Some of the most common types of gig workers today include:

  • Ride-hailing drivers (e.g. Uber, Lyft)
  • Food or package delivery persons (e.g. Grubhub, DoorDash)
  • Couriers (e.g. Amazon Flex)
  • Online sellers
  • Short-term rental landlords (e.g. Airbnb)
  • Freelance professionals (e.g. writing, graphic design, video editing)

What’s My Tax Status?

The Internal Revenue Service considers gig workers to be independent contractors. You must file a federal tax return if you have earned $400 or more in a year from your side gigs.

If you don't have a traditional job (i.e. a job with no legal employment relationship), you also need to pay a 15.3% self-employment tax on top of your income tax. The self-employment tax covers your Social Security and Medicare contributions.

Gig workers' taxes also include quarterly taxes, also known as estimated taxes.

What Forms Do I Use?

Gig workers will need to use the 1099 form to report their income. It's important to stay ahead of tax time to prevent errors on your tax return.

Prior to tax year 2020, a gig worker received a Form 1099-MISC from clients who pay them $600 or more. Business taxpayers now use Form 1099-NEC to report payments to freelancers and gig workers. Double-check the forms you get from your clients to ensure you receive the correct ones.

But if you receive payments online (e.g. PayPal, debit cards, credit cards), make sure to ask for a Form 1099-K from the payment platform.

Use a Schedule C attachment to report your gig income and expenses. If you have multiple side gigs, you may need to attach multiple Schedule C forms on your return. All gig income must be reported, even if you earned less than $600 from a single client.

What if I Don’t Report My Gig Income?

If you've received a Form 1099-NEC, that income has been reported to the IRS. Failure to report your gig income on your federal tax return may result in penalties.

For instance, if you underreport your tax by more than 10%, you may incur a substantial understatement penalty. This penalty is equal to 20% of the underpaid tax.

To avoid any tax issues, it's best to report all gig income, including cash payments.

Can Gig Workers Claim Tax Deductions?

Gig workers can take advantage of tax deductions to reduce their tax liability. Make sure to only claim deductions on expenses that are directly related to your side gigs.

Let's say you're an Uber driver. Keep a detailed log of your car's mileage while you're on the clock. You can then use the standard mileage rates to deduct the costs of operating and maintaining your vehicle.

If you mainly work from home, you can also claim a home office deduction to reduce your tax liability. Business expenses you can claim include new equipment, office supplies, and the cost of marketing your services.

It's important to maintain detailed financial records if you want to take advantage of tax deductions. Store all your documents in a safe location and track all income and expenses.

Ines Zemelman, EA
Founder of TFX