Gig Economy Taxation: a Detailed Overview

Reporting Income as a Gig Worker

Gig economy workers must report all income earned from their endeavors. This includes, but is not limited to:

• Earnings from part-time, temporary, or side gigs.
• Income not reported on information return forms such as Form 1099-K, 1099-MISC, or 1099-NEC.
• Payments received in any form, including cash, property, goods, or virtual currency.

The IRS requires that all income be reported on a tax return, even if it does not meet the threshold for issuing a 1099 form. For more information, refer to the IRS Gig Economy Tax Center.

Calculating Taxes for Gig Workers

Calculating taxes involves several steps:

1. Determine Gross Income: Sum all earnings from gig work.
2. Identify Allowable Deductions: Track and categorize all business-related expenses, which can include home office costs, mileage, supplies, and more.
3. Calculate Net Profit or Loss: Subtract business expenses from gross income to determine net profit or loss, which is reported on Schedule C.
4. Compute Self-Employment Tax: Use Schedule SE to calculate self-employment tax, which is typically 15.3% of net earnings (12.4% for Social Security and 2.9% for Medicare).
5. Estimate Income Tax Liability: Apply current tax rates to your taxable income, considering your filing status, deductions, and credits. (Please note that as a Gig worker, you are subject to both self employment tax and your normal Federal income tax. In some cases, you may have state income tax to pay as well. For possible solutions on how to minimize these taxes, read more here.)

The Need for Estimated Quarterly Taxes

Gig workers are typically required to make estimated quarterly tax payments because:

• They do not have an employer withholding taxes from their earnings.
• The IRS mandates that taxes be paid as income is earned.
• Making these payments helps avoid underpayment penalties and large tax bills during the annual filing season.

Estimated tax payments are due on April 15, June 15, September 15, and January 15 (for the final quarter of the previous year).

Deductions for Gig Workers

Gig workers can often reduce their taxable income by deducting business expenses that are both ordinary and necessary. These may include:

• Vehicle Expenses: Costs related to business use of a car, including mileage, gas, repairs, and/or insurance.
• Home Office Deduction: If a portion of the home is used exclusively for business, a portion of rent, utilities, and other expenses may be deductible.
• Supplies and Equipment: Purchases necessary for gig work, such as computers, software, or tools.
• Marketing and Advertising: Costs associated with promoting your gig services.

It is crucial to maintain meticulous records and receipts to substantiate these expenses.

Filing Taxes as a Gig Worker

When filing taxes, gig workers should:

1. Organize Financial Documents: Compile all income statements and receipts for expenses.
2. Complete Necessary Tax Forms: Fill out Schedule C for profit or loss from business and Schedule SE for self-employment tax.
3. Submit Form 1040: Include the results from Schedules C and SE on your personal tax return.
4. Address Estimated Tax Payments: Ensure that any required estimated tax payments have been made throughout the year.

At Molen & Associates, we can help you with all of the steps above or even just a few of them if you wish! We offer bookkeeping, tax preparation and tax planning services for self-employed individuals and business owners.

Addressing Under-the-Table Income

For income earned without official documentation, such as under-the-table payments, gig workers should:

• Report all income on their tax return, regardless of whether it was paid in cash or through other means.
• Use Form 1040 to report earnings and attach any relevant schedules.
• Calculate and pay the appropriate amount of taxes, including self-employment tax and income tax.

Failing to report income can result in penalties and interest charges from the IRS.

For comprehensive information and resources, gig workers can visit the IRS Gig Economy Tax Center at IRS.gov/Gig and review Publication 535 for business expenses at IRS Publication 535. These resources provide valuable guidance on tax obligations and potential deductions to ensure compliance and optimize tax outcomes.

Additional sources:

• Self-Employment Taxes: A Deeper Dive
• https://www.irs.gov/businesses/gig-economy-tax-center
• https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses
• https://www.irs.gov/newsroom/irs-reminds-business-owners-to-correctly-identify-workers-as-employees-or-independent-contractors
• https://www.irs.gov/publications/p535/index.html
• https://www.irs.gov/businesses/small-businesses-self-employed/manage-taxes-for-your-gig-work