Taxes in the Gig Economy
Summary: Are you a freelancer, an independent contractor or a gig worker? Working for yourself means greater freedom, but it also comes with more responsibility — such as handling your taxes. Without an employer to withhold income taxes, it’s up to you to track your income, estimate what you owe and pay it on time. Click through for an overview of what you need to know to stay compliant.
The gig economy is fueled by workers who earn income from on-demand, often short-term assignments. As a gig economy worker, you may appreciate the ability to work on your own schedule from wherever you choose. You can find gigs on a digital platform or through your own professional network.
As a gig worker, you’re responsible for paying federal income tax and self-employment taxes (which cover Social Security and Medicare). If your net earnings from gig work are at least $400, you must file a tax return. All forms of payment are counted (cash, property, goods or virtual currency) as is any form of work (freelance, contract, part-time or temporary employment or side jobs).
Some businesses you work for may report payments to the IRS using forms such as the 1099-K (for payment card and third-party network transactions) or the 1099-NEC (for nonemployee compensation). However, not all your income will be reported by clients. You’re required to report every dollar you earn, even if a client doesn’t issue a 1099. Keep detailed records of all your income sources to ensure accurate reporting.
Make estimated tax payments
Unlike traditional employees, gig workers must make estimated tax payments quarterly if they expect to owe at least $1,000 in taxes for the year. Use IRS Form 1040-ES to calculate these payments and be sure to make your payments on time each quarter. Payments can be made online via IRS Direct Pay or by mailing payment vouchers included with Form 1040-ES.
If your income fluctuates significantly from quarter to quarter, you can adjust your payments to avoid over- or underpaying. Remember, failing to pay enough taxes throughout the year can result in penalties, so staying proactive is key.
Maximize your deductions
One advantage of being a gig worker is the ability to deduct business expenses to lower your taxable income. Common deductions include:
- Home office (a portion of your rent or mortgage if you have a dedicated workspace)
- Mileage (vehicle expenses for business-related travel)
- Supplies (tools, materials and/or equipment necessary for your work)
- Health insurance premiums (purchased by you rather than an employer)
- Education (courses or training related to your field)
- Internet and phone (if used for your business)
- Travel (expenses for work-related trips)
Additional deductions are available; consult a tax professional for a complete list.
Keep receipts and detailed records of all expenses, as these deductions can significantly reduce the amount you owe. Additionally, you can deduct half your self-employment tax, even if you don’t itemize deductions on your tax return.
Many software tools are available to track income and expenses, estimate taxes and even file returns. Also remember that you should receive copies of all 1099s by Jan. 31 each year.
Navigate multistate work
If you perform work in multiple states, taxes are based on the physical location where the work is conducted. If you travel to another state to work, you may be responsible for taxes in both states. In most instances, you’ll owe taxes to the state where you live, regardless of where your clients are located. If you’re unsure, consult a tax professional to ensure compliance with state tax laws.
Working for yourself offers flexibility and independence, but it also requires careful tax management. Stay informed, keep accurate records and take advantage of deductions to minimize your tax burden. If you’re unsure about any aspect of your taxes, consult a tax professional, who can provide personalized advice and ensure compliance.
