Gig workers have different obligations than those of traditional W-2 workers. As independent contractors, freelancers or "gig workers" need to ensure they are meeting their tax obligations to the IRS and avoiding any tax penalties. Here’s what you should know about gig work, as well as four tax considerations for gig workers.
What is gig work?
Gig work is a nontraditional way of working and includes freelance work, independent contracting, and temporary jobs. Gig workers work for themselves, meaning they can choose the jobs and clients they want to work with. Gig work is typically found through online platforms or job search apps.
Since a lot of gig work is part-time, project-based, or hourly, workers may take on multiple jobs at a time to support themselves. Gig workers are typically taxed as self-employed workers, so they’re responsible for paying taxes to the IRS themselves rather than having taxes taken out of their paychecks by an employer.
Examples of gig work include:
- Ride-share and delivery drivers.
- Providing creative services like writing, photography, or graphic design.
- Consulting.
- Renting out property or equipment.
- Temporary event jobs.
- Software developer and web design jobs.
- Running errands or completing tasks for clients.
4 self-employment tax essentials for gig workers
1. You'll need to pay estimated quarterly taxes.
Gig workers need to pay quarterly estimated taxes to the IRS to avoid underpayment penalties. The amount of money gig workers owe the IRS depends on the amount they make and can be estimated using Form 1040-ES. If you’re a gig worker and believe you’ll owe the IRS more than $1,000 that tax year, you must pay quarterly taxes in order to avoid the underpayment penalty.
The due dates for these quarterly taxes are:
- April 15th (for payments received January 1st – March 31st).
- June 15th (for payments received April 1st – May 31st).
- September 15th (for payments received June 1st – August 31st).
- January 15th (for payments received September 1st – December 31st).
2. You'll need to pay self-employment taxes.
If your net earnings from gig work are over $400 a year, you have to pay self-employment taxes. Along with federal and state income taxes, self-employed gig workers owe an additional 15.3% in self-employment taxes, with 12.4% to Social Security and 2.9% to Medicare.
Your clients may send you a 1099-NEC form before tax season. If not, you’re responsible for calculating your own self-employment taxes and making quarterly installments as detailed above. Some gig workers may find it helpful to pay in monthly installments for their taxes rather than a larger chunk each quarter.
To track your expenses, you can start by opening a business bank account so you can separate your personal and business expenses.
3. You'll want to keep records of expenses and income.
Keeping proper inventory of all expenses and income, including cash payments, is important when filing taxes as a gig worker. Many gig workers operate on the honor system when it comes to reporting cash tips or cash received to the IRS. If the IRS does an audit and there are cash payments not reported, you’ll be penalized and owe additional payments. Ensure you’re keeping track of all expenses related to your gig work to check for possible tax deductions.
4. You might qualify for specific deductions.
As a gig worker, you may be qualified for deductions based on expenses you’ve paid due to your gig work. Deductions or partial deductions can include internet, home office space, office supplies, phone service, and transportation.
However, you may be questioned by the IRS if you can’t prove these expenses were for your gig work. That’s why it’s important to keep your receipts and proper records. For example, if you’re a driver, you may have to use an app in order to gain clients. However, you’re unable to write off 100% of your cell phone bill in your tax deductions.
There are many factors for gig workers to consider when it comes to taxes. Gig workers may benefit from consulting a CPA or financial professional for assistance with their tax obligations.
Tracking expenses and deductions
Gig workers need a way to keep track of their expenses and deductions throughout the year so they’ll be prepared come tax season. Accurate recordkeeping ensures that you can take advantage of all eligible deductions and protects you in case of an audit.
To track your expenses, you can start by opening a business bank account so you can separate your personal and business expenses. Since you aren’t mixing business expenses with personal transactions, it’ll be easier to get a clear picture of your business finances.
If you use accounting software, you can sync the software to your business bank account and reconcile your transactions each month. You can also print off quarterly and annual reports to help you monitor your expenses and compare them year over year.
Many people find accounting software intimidating, but there are many user-friendly options available. And if you choose QuickBooks Online, you can also track your receipts and your mileage.
Lauren Wingo also contributed to this article.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
