Whether you just entered the gig economy as a result of the COVID pandemic or you've been a gig worker since before that time, it is your responsibility to learn your income tax responsibilities and file correctly in order to avoid any penalties.
What Is a Gig Economy?
The gig economy is the exchange of on-demand goods, services or work for income. Also called the "access economy" or the "sharing economy," much of the gig economy functions online via a website, app or another digital platform.
What Is Considered Gig Work?
Gig work includes freelance, temporary and on-demand work, no matter if it's one-time, temporary, part-time or a side job. Examples of gig work include, but are not limited to:
- Selling goods online
- Driving a car to transport goods (ie. deliveries) or people (ie. rides)
- Completing tasks or running errands
- Renting all or part of property (eg. a room in a home)
- Renting equipment
- Providing professional or creative services
What Should Gig Workers Know Before Filing Taxes?
The most important thing any gig worker should know about taxes is that all gig work income is taxable. This is true whether or not the employer reported paying you reported the income on a tax information form, such as a W-2, 1099-K, 1099-MISC or other income statement and no matter whether you received the income as cash, virtual currency, property or goods.
The IRS considers gig work as self-employment, and if you earn at least $400 gross through self-employment during any tax period, you must file a tax return on that income.
As an Employee
If you perform the gig work as an employee, your employer may withhold those taxes from your pay, but not always. It is therefore your responsibility to keep track of all the gig work you performed as an employee and all taxes you did or did not already pay through employer withholdings, then file an annual tax return reporting that information and paying any outstanding taxes due.
As an Independent Contractor
If you perform the work as an independent contractor, you may need to pay estimated taxes quarterly. To ensure you consistently meet this responsibility, it can be helpful to hire a tax accountant.
How a CPA for Small Businesses Can Help
If you're unsure how an employer for a gig considers you for tax purposes, ask that employer or review the IRS distinctions between employees and self-employed individuals.
Your tax accountant can then help you figure out which situation and related tax obligation applies to each of your gig jobs and help you file the respective information on your annual tax return.
How to File Taxes as a Gig Worker
Whether you'll be filing your taxes yourself or with the aid of an expert CPA for small businesses, the key to meeting your tax obligations as a gig worker is to prepare throughout the year for your annual return. If you wait until the last minute to obtain all the information you need to properly file your self-employment taxes, you very well could submit a return with a mistake or omission that could garner you a penalty.
To prepare for your annual return, keep detailed records of each gig job you perform throughout the year. Keep track of:
- The employer, including tax ID number
- When you worked, including days and hours
- How much you earned for the work, including earnings for which the employer filed no tax statement
- How much in deductible expenses you incurred for the work
Additionally, save all the receipts for your deductible expenses.
Keep all of this in one place, and keep it safe and secure, including making a backup of your records and copies of your receipts and storing them all safely and securely elsewhere. For more information on keeping adequate records, refer to the IRS record-keeping resource.
As the time approaches to file your self-employment taxes, whether your annual return or, if applicable, estimated quarterly taxes, collect all your income forms (eg. W-2s and 1099s) and all sales receipts not included on those forms, then deduct your allowable expenses from each of them. Enter in all the appropriate information on the relevant tax form, typically a Form 1040, otherwise known as a Schedule C. Then submit it either online or via postal mail.
Above all, submit your self-employment tax return on time. If you later find that you made an error or omitted certain relevant information, you can always file a 1040-X Amended US Individual Income Tax Return.
Tax Deductions for Gig Workers
As a self-employed individual, you can deduct certain expenses from your taxes. Which expenses you can deduct depends in part on the category of expenses into which each falls. Categories of expenses include:
- Business expenses, including for the business use of your home
- Entertainment, gift and care expenses
- The Qualified Business Income Deduction
Among the deductions falling into these categories that might apply to you include the home office deduction, mileage deduction and education deduction.
When calculating your tax deductions for gig work, be sure to separate them into their appropriate type:
- Costs of goods sold
- Capital expenses
- Personal expenses
- Qualified business expenses
Working Gigs in Multiple States
Because income taxes are handled on a state-by-state basis and each state handles them differently, you must pay income taxes to each state in which you live and work, even if an employer for whom you worked is based elsewhere. This means you may need to pay income taxes in multiple states for your gig work, such as if you commute to a different state for work or move to a new state during the tax period.
There's a lot to remember and keep track of to find and perform gig work, let alone meet your tax obligations for all that work and avoid incurring IRS penalties. To protect yourself and your wallet and to ease your mind and workload, enlist a Charlotte small business CPA to help you with all of that. A CPA Charlotte NC based is best to ensure you comply with all local and state laws and receive all applicable tax benefits.
You have a choice of CPA firms in Charlotte NC to meet these needs. Among the top accounting firms in Charlotte NC for self-employed gig workers is Scott Boyar CPA.