What Self-Employed Can Do To Become Smart About Gig Income
A significant impact of COVID-19 on the U.S. economy has been the rise of "gig" or freelance work. Workers who perform essential tasks, such as delivering groceries to people who live far away, are considered gig workers. There are more than 100 types of gig work, including Uber driving, Instacart shopping, Amazon Flex delivery, and so on, which are usually self-employed and taxed as such. Others established independent consulting and other businesses based on their specialized skills.
You could make your primary full-time income from a gig economy job or it could just be a side gig income.
No Free Lunch
You are typically considered self-employed if you are a gig worker. You are responsible for paying federal income taxes on your own since an employer does not deduct tax payments from your paycheck. State income taxes may also apply depending on where you live.
Taxes in the United States are considered "pay as you go." Independent contractors typically pay their self-employment tax and federal income taxes four times a year, the following year: April 15, June 15, September 15, and January 15.
It is possible that penalties will apply if you do not pay enough in these four payments to cover the required amount for the year. If you pay estimated income tax payments equal to 90% of the tax shown on your return for the current year or 110% of the tax shown on your return for the previous year, you'll avoid penalties.
What Is Self-Employment Tax?
In addition to your traditional income taxes, if you earn more than $400 from your self-employment, you will also have to pay self-employment taxes. Social Security and Medicare taxes are included in this tax, which is calculated on Schedule SE and incorporated into your tax return. Your Form 1040 also reports this amount on Schedule 2, Line 4.
Gig Economy Workers
As a self-employed person, you won't receive a W-2 from your employer, so you are sometimes called a "1099 worker" or "independent contractor". If you are paid $600 by any client or customer during the year, you will receive a Form 1099-MISC. You should monitor and verify that the amount on the 1099 you get matches the amount on your records. You should monitor the 1099s you receive since clients send the same form to the IRS.
No matter whether individuals receive information returns or not, they are taxed on their earnings from gig economy work. Payments exceeding $600, regardless of the number of transactions, are subject to the issuance of Form 1099-K in 2022 as per the reporting requirement. In other words, some gig workers might receive an information return. No matter how full-time or part-time the work is, or whether or not an individual is paid in cash, the law applies.
On Form 1099-K, a third-party payment system may report gross amounts paid to you. Even if your income from that client was not enough to qualify you for a 1099, you still need to report it. Taxes for gig workers are levied when earnings are received, not when requests for payment are made (unless you employ the accrual method of accounting).
Gig economy workers can submit a new W-4 to their employer if they have another job as an employee. This will increase the amount of taxes withheld from their paychecks as a result.
How To Make Worker Classification
A business owner needs to determine whether an individual providing services is an employee or independent contractor in order to successfully operate.
As a general rule, you have to withhold and pay income taxes, social security taxes, Medicare taxes as well as unemployment taxes when you pay an employee's wages. The IRS does not require you to withhold or pay taxes on payments made to independent contractors.
Deduct Business Expenses
The taxes of gig workers are based on any profits left over after deducting business-related expenses from their revenue. In addition to payment processing and office equipment costs, you will probably have advertising costs associated with providing your service.
You may also be able to deduct some expenses associated with living in your home if you use part of your home to work. There are, however, significant restrictions on this.
Avoid Going It Alone
Maintaining excellent records of income and expenses is essential for gig workers making accurate deductions. It is important to work with professional tax accountants to ensure that you do not overpay your taxes when joining the gig economy.