What to Know About Taxes and the Gig Economy
The gig economy has a lot to recommend it, but in a recent notice, the IRS is reminding gig workers that taxes are still a requirement, even if they can be a little confusing in this model. The agency says that "taxpayers must report their gig economy earnings on a tax return–whether they earned that money through a part-time, temporary, or "side gig." It has even established an online Gig Economy Tax Center to provide information and resources to help entrepreneurs and workers understand and meet their federal tax obligations. The more you know, the more you can effectively work with your tax professional.
What do you have to pay?
In brief, the IRS says that taxpayers must report all income on their tax return unless excluded by law, whether or not they receive an information return such as a 1099. That is, just because you don't get a form, it doesn't mean you're off the hook. You may have special payment responsibilities: Individuals involved in the gig economy may also be required to make quarterly estimated tax payments to pay income tax and self-employment tax, which includes Social Security and Medicare taxes.
Know your classification
Gig economy workers who perform services, such as driving a car for booked rides, running errands, and other on-demand work, must be correctly classified, stresses the IRS. Classification helps the taxpayer determine how to properly report their income:
- If they are employees, they report their wages from Form W-2, Wage and Tax Statement.
- If they are an independent contractor, they report their income on a Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
Which are you? It can be a thin line, but there's a line nonetheless. Says the IRS, the business or the platform determines whether the individual providing the services is an employee or independent contractor. Business owners can use the worker classification page on IRS.gov for guidance on properly classifying employees and independent contractors, but a conversation with your tax professional may also be helpful.
Keep track of expenses
One of the good parts about running a business is that you may have some helpful deductions. Notes the IRS, "Individuals involved in the gig economy may be able to deduct expenses related to their gig income, depending on tax limits and rules." Taxpayers may be able to lower the amount of tax they owe by deducting certain expenses. However, if you plan to take certain deductions, you must be able to document them, so it is vital to keep careful records of your business expenses.
With attention to detail and professional advice, you can easily meet your gig economy tax responsibilities. Contact R&A if you have questions about your situation.