During the early onset of the 2020 pandemic, many people decided to join the gig economy workforce. People did this for many reasons such as to get out of the house for a little while, to help others who could not help themselves, and to just keep their family afloat with rent, clothing, and food, to name a few reasons. Whether this type of work was done as an extra source of income or actual business, all taxpayers must understand how this gig work affects their taxes.
A quick background on what a “gig” economy is or what “gig” economy means will be explained here. A gig economy is also known as an “on-demand” job, access, or a sharing economy. The people involved the gig economy earn money as freelancers, independent workers, or employee. The tech used are online platforms to connect them with customers that need a good or service. Examples of some of these goods and service would be providing delivery services, ride-share services, and perhaps renting out their home or a spare bedroom for a specified amount of time.
Here are some very important points that a taxpayer should know about the gig economy and taxes
- Money that is earned through this type of work is usually taxable income;
- Tax implications for both the company (online platform) and the person performing the service(s);
- Income is usually taxable even if the taxpayer does not receive a 1099-NEC (Non Employee Compensation form), 1099-MISC form, 1099-K form, or a W-2.
- Activity may be part-time or side work;
- Taxpayer is paid in cash;
The gig economy worker is generally required to pay income taxes, FICA taxes, Self-Employment taxes, and additional Medicare taxes.
Independent contractors can deduct business expenses. However, before running out to write off everything under the sun, its always a very good idea to check the rules around anything you may want to write off like car and home expenses. Having a solid foundation of this knowledge will only benefit you and save you from any possible IRS audits. Independent contractors must also remember to track their expenses in a logbook, a spreadsheet, etc.
When renting out property special rules usually apply since the taxpayer(s) use it for themselves as well. Taxpayers must remember that all rental income is taxable income.
Gig workers also have to remember that taxes are not withheld from their pay because they are not employees of a company. Here are two ways that they can pay their taxes in advance:
- Gig workers that may have a W-2 job where there employer withholds taxes from their paycheck can complete and submit a new W-4. The employee would want to do this so additional taxes get withheld from their actual employer paycheck. Having these extra withholdings being deducted can help cover the taxes owed from their gig work.
- The gig worker can make estimated quarterly payments. They do this to pay their taxes and any self-employment taxes owed throughout the year.
If you would like more information on gig work, please click on this link.
