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Maybe you drive for a ride-sharing app, freelance or have a one-person home repair business. If you do one of these things or myriad others, you’re a gig worker — part of a growing segment of the economy. These alternative work arrangements, as they’re also known, accounted for 15.8% of workers in 2015, up from 10.1% in 2005, according to researchers at the National Bureau of Economic Research. And the percentage is only increasing.
While the range of potential gigs is vast, all gig workers have one thing in common: taxes. If you earn money from your work, even if you do it as a “side hustle,” you likely have to pay taxes.
But the way you’ll pay taxes differs from the way you would as an employee. To start, you’re typically considered self-employed. As a result, and because an employer isn’t withholding money from your paycheck to cover your tax obligations, you’re responsible for making federal income tax payments. Depending on where you live, you also may have to pay state income tax.
The importance of quarterly tax payments
The U.S. tax system is considered “pay as you go.” Self-employed individuals typically pay both federal income tax and self-employment taxes four times during the year: on April 15, June 15, and September 15 of the current year, and January 15 of the following year.
If you don’t pay enough over these four installments to cover the required amount for the year, you may be subject to penalties. To minimize the risk of penalties, you can pay either 90% of the tax you’ll owe for the current year or the same amount you paid the previous year.
Because you’re self-employed, your taxes are based on the profits left after you deduct expenses from your revenue. Expenses can include payment processing fees, your investment in office equipment, and specific costs required to provide your service. Keep in mind that, if you use a portion of your home for work space, you may be able to deduct the pro rata share of some home-related expenses.
As a self-employed person, you won’t get a W-2 from an employer. You may, however, receive a Form 1099-MISC from any client or customer that paid you at least $600 throughout the year. The client sends the same form to the IRS, so it pays to monitor the 1099s you receive, and verify that the amounts match your records.
If a client (say, a ride-sharing app) uses a third-party payment system, you might receive a Form 1099-K. Even if you didn’t earn enough from a client to receive a 1099 or you’re not sent a 1099-K, you are responsible for reporting the income you were paid. Keep in mind that typically you’re taxed on income when received, not when you send the request for payment.
The Tax Cuts and Jobs Act of 2017 may impact some gig workers. That’s because the law allows some sole proprietors, as well as partnerships, LLCs and S corporations, to exempt from taxes 20% of their net qualified business taxable income. This provision currently applies to years beginning on or before December 31, 2025. But the law also places restrictions on this deduction for taxpayers whose taxable income is equal to or more than $157,500 (for an individual) or $315,000 (for taxpayers who are married and file jointly).
As a gig worker, you need to keep accurate, timely records of your revenue and expenses so you pay the taxes you owe, but no more. We can help keep you current with new developments.