As the gig economy grows, more and more people are finding flexible jobs through platforms like Etsy, Uber, Airbnb, DoorDash, etc. If you're one of the many people who have taken on freelance or contract work in the gig economy, then you need to be aware of how your income is taxed. In this blog post, we'll go over some basics of gig economy taxes so that you can be sure you're doing everything correctly.
If you’re a gig worker – especially someone who’s providing rideshare, food delivery, or other such 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 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, that term – self-employment – lays out the reason why the IRS considers you a business owner.
Being your own boss, as a gig economy worker, can be a wonderful opportunity if you take the proper steps to plan for tax season.
What is the Gig Economy, and Who Are Its Workers?
The gig economy is a term used to describe the growing trend of workers in short-term, contract-based jobs. This includes jobs like ridesharing, delivery, freelance jobs, independent contractors, and other on-demand services. Most gig workers are considered independent contractors, which means they are not employed by a single company.
A gig economy is a free market system in which temporary positions are common and organizations hire independent workers for short-term commitments. The term "gig" is a slang word for a job that lasts a specified period of time.
The IRS draws no distinction between working for yourself as an independent contractor for one of the ride-hailing apps or delivery services and working as the owner of what you’d recognize as a small business – and that can have some unforeseen consequences for your taxes.
Why Gig Working Has Gained Popularity
The gig economy has gained popularity for a number of reasons, but chief among them are the following:
- The technological advancements have made it easier than ever to find short-term work. - The desire for more flexible job arrangements.
- The increased use of contingent workers by companies looking to save on labor costs.
Another perk for businesses in the gig economy is that businesses can save a lot of money and resources by hiring independent contractors to perform a particular task.
Businesses aren't responsible for providing employee benefits, such as sick leave and health insurance. At the same time, they do not need to pay for the space, equipment, and training of independent contractors.
How Do Taxes Work for Gig Workers?
Gig workers are considered self-employed, which means they are responsible for their own taxes. This includes estimated taxes and Social Security taxes.
They may also have difficulty claiming business expenses since these can be seen as personal expenses by the IRS.
Unique Tax Challenges Faced by Gig Workers
The main challenge gig workers and independent contractors face is the fact that they are considered self-employed by the IRS. However, there is more that they need to consider.
Another challenge they face is that they may not have access to the same tax breaks as traditional workers.
For example, they may not be able to deduct their health insurance premiums or retirement plan contributions from their taxes. On top of that, unemployment insurance typically does not cover gig workers who can't find employment.
Platform workers have the added benefit of having all their potential sales (that is, jobs) right in front of them, on their computer. They don't have to market themselves, place any calls, or take out ads, while still being able to build a freelance career.
This can be an easy path to have a "side-hustle" for additional income. In the freelance economy, technology platforms that can connect people with job opportunities allow gig workers to work on the side of their traditional jobs in order to make extra money or gain skills in another field.
Gig work is the primary source of income for more than one in 10 workers.
It is important to note that the majority of platforms do not offer the benefits of a traditional job. For example, health insurance is often not included as a benefit since gig workers are not considered full-time employees with the platform.
If you own your own business that gets independently contracted by others for specific projects, it is important to document what you use for each project - especially when you work multiple jobs at once.
Some materials may be used for multiple projects (i.e adobe suite). It is important to only write off the expense as many times as you paid for it, rather than how many times you used it. However, it is a good habit to make a note with each project, so you know what materials, software, and resources you use and when - for your own records.
The IRS has a specific classification for temporary workers, which is "engaged in labor or services that is both:
(a) Casual, and
(b) Indefinite as to duration."
Also known as contract workers, this can apply to people who are brought on for a short-term project or those who are hired with the understanding that the position will end when the project does.
While some people in the gig economy may enjoy the flexibility that comes with these types of jobs, others may find it difficult to plan for their financial future without the stability of a traditional job.
Companies are also not typically required to pay employees in temporary positions minimum wage or overtime.
What Should Gig Workers Do to Prepare for Tax Season?
Gig workers should keep track of their income and expenses throughout the year, so they are prepared when tax season comes around. They may also want to set aside money each month to pay their taxes since they will be responsible for paying estimated taxes and Social Security taxes.
This is an important precaution to take throughout the fiscal year, so when tax season rolls around - you are prepared.
If you are a gig worker, it's important to be aware of how your income is taxed. By understanding the basics of gig economy taxes, you can be sure you're doing everything correctly come tax season. If you have any questions, be sure to speak with a tax professional.
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. This tax 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 the 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 worker, so you don’t have the option to withhold your taxes – right? Not quite. Self-employed workers should send 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.
What Deductions Can A Gig Worker Claim on their Taxes?
Gig workers may be able to claim deductions for business expenses, such as the cost of a car or cell phone used for work. They may also be able to deduct home office expenses if they have a dedicated space for work.
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 a part of the gig workforce, 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 the business.
Independent Contractors: Better To Be Safe Than Sorry
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 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 had just accounted for your cash income in the first place.
What Should Gig Workers Do if They're Not Sure About Their Tax Situation?
If gig economy workers are unsure about their tax situation, they should reach out to a tax professional for help. A tax attorney or accountant can help them understand their tax obligations and ensure they are compliant with the law.
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.
Still Unsure? Talk to An Experienced Tax Attorney Today!
For more information about taxes and the gig economy, people can visit the IRS website or consult with a tax professional at Damiens Law PLLC today!
If you need help from an experienced tax law attorney, reach out to Damiens Law Firm, PLLC by contacting us online or calling 601-401-6055 for help!