Navigating Self-Employment: Top Tax Tips for Gig Workers

How do I know if I’m an independent contractor, gig worker, side hustler, or freelancer?

According to the IRS, if you work for yourself to make money or profit, then you are considered a small business owner. This includes independent contracting, side gigs, hustles, and freelance work (full- or part-time), even if you have a regular, full-time employee job. If you are making money by working a side job for yourself, that means you are self-employed. Therefore, you will be required to pay income taxes, state taxes, self-employment taxes, and possibly others.

The good news is that there are many benefits you may be eligible for that could boost your tax situation including tax deductions, options on your taxes and even tax credits.

Here are a few examples of common independent contractor or gig worker jobs that would make self-employment income:

• Rideshare driver
• Freelancing
• Internet selling
• Pet sitting
• Dog walking
• Content creating – so influencers and bloggers – yep, you are self-employed
• Babysitting, nannying, and caregiver
• Personal or virtual assistant
• Selling goods at local markets and festivals
• Tutoring and coaching
• AND MANY MORE

What’s the difference between self-employment taxes and income taxes?

When you are employed by a business, that business will withhold money from your paycheck to cover your federal and state income taxes as well as Social Security and Medicare taxes. Withholding is the money an employer deducts from an employee’s gross wage that automatically gets removed and paid directly to the government for all these taxes and likely some other benefits like health insurance too.

When you work for yourself, you take on that burden and are required to pay those taxes yourself. This tax process is vastly different than being an employee. Federal and state income taxes are taxes you owe for well having income. Other taxes you owe like self-employment taxes are an additional tax you pay, above and beyond income tax, to fund Social Security and Medicare. These taxes are owed through a series of quarterly payments you make to IRS and states and are due provided you have net income. It’s up to you to regularly “pay in” to the IRS the taxes you owe, or you risk penalties.

How do I know how much income I’ve made from my gigs and what self-employment tax forms will I receive from the business that I worked for?

Each and every business that you did work for will send you either a form 1099-K and/or 1099-NEC (non-employee compensation) form, postmarked by January 31. The forms will show you most, or all, the gross income (not net income) you made from that business. When you file your taxes, you need to include all 1099s, and any income not reported on a 1099, in your calculations on Schedule C, Profit or Loss from Business, which is a part of your 1040 tax return package and specifically to calculate your net income from self-employment on which you owe income taxes.

Schedule C is a critical form for self-employed taxpayers. Schedule C is a tax form used to report business-related income as well as expense you can take and deduct and reduce your taxable income amount.

What are some business-related expenses that will impact my tax return and count as deductions?

As a small business owner and self-employed taxpayer, there are several deductions that can reduce your taxes if they relate to your work. The expenses you pay as you do your work, or to do your work, or to make money are deductible.

Note: Deductible means that those costs can be subtracted from the total income you made. That means lower taxes and that’s the goal. Employees do not generally have these deductions.

For example, if you drive for Uber or Lyft, your car payments, cost of gas and much more are part of doing your job and are deductible.

A big deduction for self-employed taxpayers that’s not available to employees is the home office deduction. If you work in a home office, a place in your home where you do or coordinate business, the cost of your office is considered a deductible expense on your tax return. You will need to keep detailed records, including receipts, for all the expenses associated with your work.

What are other common tax deductions available to gig workers?

There are many expenses you can deduct, including:

• Advertising expenses
• Office supplies you purchase to operate your business
• Rent paid for equipment, storage, or office space
• Banking and legal fees associated with your business
• Professional fees for things like bookkeeping
• Membership dues.

The list is really endless and specific to your type of work activity, but you need to keep track of what costs and expenses you incur and keep documentation.

When do I pay taxes as a gig worker with self-employment income?

Small business owners and gig workers with self-employment net income generally might need to pay quarterly estimated taxes, meaning you send money to the IRS every quarter to cover the taxes on the money you made that quarter.

If you are employed by a business and get a W-2 they typically withhold money for taxes from each of your checks. But, because you are self-employed, you need to handle that yourself on a quarterly basis. Quarterly estimated tax payments are due the 15th of the month after the quarter ends. If the 15th is on a non-business day, the payment is due the next business day.

If you expect to pay more than $1,000 in taxes on your self-employed income for the year then you likely need to pay estimated taxes each quarter to avoid underpayment penalties. When you file your tax return, if you have not paid enough taxes through either withholding or estimated quarterly taxes, you could be subject to an underpayment penalty.

How do I figure out what I need to pay each quarter?

It is important to have a good estimate of your income and deductions for the year. One easy way to do that is to use last year’s tax return as a starting point. Then, you can either work with a tax professional to do the calculations or do them on your own using the IRS Form 1040-ES.

Be sure to pay your estimated taxes by the quarterly due dates (April 15, June 15, September 15, and the following January 15). Don’t miss these payments, as you could face penalties.

As a gig worker, how can retirement savings benefit a tax return?

If you are self-employed, you have options for retirement plans, even more those who are traditional W-2 employees. These include plans like Solo 401(k)s, SEP IRAs, or a Simple IRA.

The various choices and options and considerations for what to choose to contribute to are personal, but we recommend putting some portions towards a qualified savings plan, otherwise you are making two mistakes.

• First: you are not saving money, and that’s never best practices for the future
• Second: you are missing on a host of tax benefits, deductions, and tax-free earnings that can jump start your savings and even boost your returns on your saved money.

The IRS defines how much money you can contribute to your IRA and really all the benefit plan options every year. The limits depend on several factors, including the type of plan you have or are using or contributing to your income, and your age.

Have questions about how your tax return changes as a gig worker? Find an office near you and work with a Tax Pro today.

About the Author

Mark Steber is Senior Vice President and Chief Tax Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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