How to be prepared for tax season as a gig worker
Gig work offers flexible hours and the opportunity to earn some extra income, but it also come with greater tax responsibilities. If you have a side hustle or do gig work fulltime, brush up on the basics so you’re prepared for tax season.
That side hustle you love for the flexibility and extra income can be a challenge when tax season rolls around.
Gigs like food delivery, online reselling and freelance consulting are considered self-employment. That means workers must track and pay their own taxes rather than relying on an employer to make payments on their behalf.
And with a major change for those selling items on third-party sites like eBay, Etsy and Poshmark, there's growing confusion around tax time. Such sites must now report to the IRS total earnings by any individual who makes at least $600 during the year. Previously, the reporting threshold was $20,000 and 200 transactions.
“This is where some confusion has come in,” says Jennifer Monsos, a CPA who helps small business owners with their taxes. “A lot of the resellers were thinking, ‘If I don’t make $20,000 and 200 transactions, I don’t have to report my income. And that’s not accurate.”
Self-employed individuals – including resellers – have always been required to report all income to the IRS and pay any taxes on that income. It’s just that now, the IRS will have more visibility into how much it should be collecting, says Mark Tew, a CPA who specializes in tax preparation for resellers.
The new $600 threshold for filing a 1099-K will impact 2023 tax filings. The change was part of the American Rescue Plan Act of 2021. While the act authorized stimulus checks to help taxpayers during the pandemic, it also included measures to help the government collect all taxes that are owed.
We spoke with Monsos and Tew about some of the key points that gig workers should consider when filing taxes this year and beyond.
Quarterly versus annual payments
In a traditional full-time job, your employer pays your estimated taxes on a quarterly basis, and you file a tax return every year. By contrast, if you’re self-employed, you are responsible for paying the estimated taxes owed from your gig-work income.
Estimated tax payments are due four times a year on the following dates:
Paying estimated taxes can be done online, but figuring out how much to pay is the trickier part. The IRS provides form 1040-ES to help individuals calculate their payments.
Briefly, calculating your estimated taxes consists of estimating the taxable income you expect to make, then figuring out where you land on the tax bracket and what your self-employment tax is. Once you have that figure, divide by four and that’s what you’ll pay quarterly.
There is another option for those who have full-time employment but earn extra income on the side. These workers can typically file their tax return annually (the deadline is April 18 this year) using the W-2 they receive from their employer, and attach a Schedule C to reflect income and expenses from their side income, Monsos says. If needed, you can have your employer withhold more from your paychecks to cover the taxes you owe from the side work.
The key is to make sure you won’t owe the IRS more than $1,000 at the end of the year. If you do owe more than $1,000, the IRS generally wants you to pay on a quarterly basis.
Be your best bookkeeper
The best thing you can do for yourself as a gig or contract worker is to keep a record of everything — every payment made (even cash payments), every tip and every transaction. Tracking expenses means you can confidently take deductions off your taxes, potentially saving you money.
One way to help track expenses is to open a separate banking account for your business needs. Automate all earnings to be deposited into this account and use the same account to pay for any business-related expenses.
“That’s going to make it so much easier to figure out the total of the different deductions you can claim to offset the income,” Tew says.
In addition to purchases, anything you use for your business has the potential to be tax-deductible. For example, if you’re using your vehicle to make deliveries, every mile you put on it causes it to depreciate. That depreciation can be written off, along with related gas usage and maintenance required to work your gig job. Ultimately, if it’s related to you getting your job done, make a record of it.
Consulting a tax professional
For some gig workers, the best route is to work with a tax consultant. Jenna Leskela, a U.S. Bank employee with a side business as an energy healer and personal stylist, says she tracks her income and expenses each year and then hands the records over to an accountant.
“They just know the ins and outs of what you can claim,” Leskela says. “He’s able to ask me the right questions — things I wouldn’t have been able to think of on my own.”
Paying someone to handle her taxes is worth the expense, because it frees her up to focus on the creative side of her business, she says.
“The reason I’m doing this is because I have a passion to serve other people and help them feel amazing,” says Leskela, owner of LightHorseStudios.com. “And that’s where I want to focus my time and energy."
Saving for retirement
Being self-employed grants you lots of freedom, but it also means you’re the one in charge of saving for your future. Whether you’re just starting out or you’ve been working in the gig economy for a while, the best time to find a good tax-qualified retirement plan is now.
For more tax information, visit our tax resource center.
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