What Gig Economy Workers Need to Know about Taxes

As a response to the COVID-19 pandemic that picked up serious steam at the beginning of March, the U.S. Treasury Department and Internal Revenue Service extended Tax Day to July 15, 2020. That means that if you haven’t yet filed your 2019 tax return, you have about 10 more weeks to do so.

If you’re a gig economy worker – especially someone who’s providing rideshare, food delivery, or other such services services through a tech company’s app – you’re probably busier than ever and maybe even making more money than ever before, too. Unfortunately, you must still pay taxes on all of your earnings as you would any other tax year.

What most gig economy workers don’t know about their taxes is that the IRS considers you a business owner even if you think of yourself as an employee for Uber, Postmates, Instacart, or another tech company that provides self-employment opportunities. But, in that term – self-employment – lays the reason why the IRS considers you a business owner.

The IRS draws no distinction between working for yourself as an independent contractor for a rideshare or delivery service and working as the owner of what you’d recognize as a small business – and that can have some unforeseen consequences for your taxes.

Without further ado, here’s what gig economy workers need to know about their taxes during this (and any other) tax year.

The Self-Employment Tax

You expected to pay taxes on your income appropriate for your tax rate, but did you anticipate paying another tax on top of that? If you’re filing your taxes as a sole proprietor – another term for someone who can be considered an independent contractor or small business owner – your taxable income and business income are indistinguishable from one another.

The self-employment income tax rate is 15.3 percent, and accounts for your contributions to Social Security and Medicare taxes that an employer would pay for his or her employees.

Tax Withholding throughout the Year

When you’re a traditional employee, your W-4 lets you tell your employer how much tax to withhold from your paychecks. Essentially, you’re paying your tax bill “as you go.” Tax refunds, then, are effectively checks for money you paid in withholding in excess of your tax liability. When you withhold taxes and still owe more, your outstanding tax liability should be of a more manageable amount.

But you’re a gig economy worker, so you don’t have the option to withhold your taxes – right? Not quite. Self-employed workers should be sending tax payments to the IRS on a quarterly basis, which functions similar to tax withholding. Failing to do so when you’re earning a regular income from self-employment might result in penalties and an overwhelming tax bill on Tax Day.

Beware of Writing off ‘Business Expenses’

A major audit trigger for the IRS is a list of business expenses that look oddly like personal expenses. If you’re working in the gig economy, expenses like your cell phone bill, car payments, gas bills, and more can seem like legitimate business purchases to you, but this isn’t always the case for the IRS. Why? Because they see it as comingling your personal and business expenses, or worse, trying to defraud the government by writing off personal expenses for business.

Unless you can prove that these are business-related expenses with well documented evidence, you should be wary of writing them off on your tax return. Although expensive upfront, purchasing a new cell phone on a new plan that’s exclusively used for your delivery or rideshare work – and documentation exists to support that – could be a defensible way to come out on the other end of an audit relatively unscathed.

Cash Payments & Tips

If you’re paid on a cash basis, have ever received cash tips, or handled cash at all as a gig economy worker, you need to keep track of this income and report it on your taxes. The IRS will audit businesses – again, it considers you a business owner even if you’re delivering groceries – when their numbers don’t quite add up or it looks like someone is living a lifestyle disproportionate to their reported income.

Cash tips and payments can add up to create this effect, and you shouldn’t be letting any of them slide “under the table.” A tax penalty for not reporting all of your income can end up costing you more than it would have if you just accounted for your cash income in the first place.

Do You Need Help with a Tax Problem?

No one ever makes too much or too little income to have a tax problem on their plate. In fact, if you’re already struggling to bring in a steady income as a gig economy worker, a tax problem can present a serious threat to your livelihood. Don’t let it.

At Damiens Law Firm, PLLC, our tax attorney has helped clients of all kinds resolve their tax problems and feel more at ease about confronting the IRS. For nearly a decade, we’ve built a proven track record of success that helps clients file with confidence and take advantage of tax relief options they may have never even known about. By working with our firm, we can help you work toward abating tax penalties, negotiating offers in compromise, and challenging the IRS on matters such as wage garnishment, asset seizure, and tax levies.

If you need help from an experienced tax law attorney, reach out to Damiens Law Firm, PLLC by contacting us online or calling (601) 871-6322 for help!