This historic pandemic saw the freelance market surge by 25% during the beginning of 2020. From there, the statistics have nothing but risen. With lost or insufficient income sources, people struggled to make ends meet. This need eventually led them to the gig economy, which promised everything one looks for in a job – flexibility, sufficient income, and working on your terms.
Whether you’ve been working gigs for a long time or just found this industry, there are a couple of things you need to know if you don’t want to get into trouble with the IRS. If your net earnings as a gig worker exceeded $400 in 2020, you have some taxes to file.
Here are some more tax tips to help you navigate the financial side of the gig economy.
Employees vs. Independent Contractors
If you’re an independent contractor or a gig worker, the IRS deems you as a small business. While employees have their taxes automatically taken out of their paychecks, gig workers are responsible for filing them separately. It is advised that you pay your taxes quarterly every year to avoid big penalties. As a rule of thumb, you can set aside 30% of every dollar you make for taxes. As long as you actively stay on top of things and make sure not to use your tax money, all should be good.
Paperwork and Filing Requirements
The W-2 is only for workers classified as employees, and as a gig worker, you’re an independent contractor. If you’re working for a gig app, you might receive a 1099-K. However, most states have set the eligibility criteria at over 200 gigs and $20,00 in earnings. Some have a lower threshold as well, so you might want to look into that. Nevertheless, even if you don’t qualify for the 1099-K, any income above $400 for the year must be reported.
This is one of the most common deductions that gig workers have to make, especially if they work with a rideshare platform, offer delivery services, or any other work that requires the use of their vehicle. There are two ways that you can keep a check on your vehicle expenses.
- You can deduct a standard rate for every business mile you drove. For this, all you’d need is a decent mileage tracker. The usual rate for a mile in 2020 was 5 cents.
- Deduct operating expenses like fuel, insurance, maintenance, etc. If the vehicle is also in personal use, remember that you cannot deduct the full cost of the aforementioned operations.
The slightest bit of hiccup could lead you to incur quite hefty penalties as a gig worker. It is recommended that you use your flexible schedule to stay on top of your finances and avoid any trouble with the IRS.