IRS Tax Tip: How Gig Workers Can Stay on Top of Their Taxes
Find: GOBankingRates’ Best Checking Accounts 2023
Learn: 3 Ways Smart People Save Money When Filing Their Taxes
Student Loan Forgiveness: Will You Qualify for $0 Payments Under Biden’s New Plan?
According to the IRS website, “you must file a tax return if you have net earnings from self-employment of $400 or more from gig work, even if it’s a side job, part-time or temporary.” And that’s true regardless of whether you receive information returns. If your side gig involves working as an employee at a company, then your employer typically withholds income taxes from your pay, including FICA taxes to cover Social Security and Medicare. In this case, you will receive a Form W-2.
If you are a freelancer or independent contractor with no taxes withheld from your pay, then companies that pay you a total of $600 per year or more for your gig work are supposed to send you a 1099-NEC. In the event the company pays you via a third-party payment processor such as Venmo or PayPal, you should receive a 1099-K from the payment processor instead. However, this only applies if the total income you received exceeded $600 in 2022, regardless of the total number of transactions.
Live Richer Podcast: How To Leverage Your Investments
Because of the rules, you might not receive a 1099-K, 1099-NEC or any other information return for 2022. This means it’s up to you to maintain records of all the side gig income you earned during the tax year so you can file an accurate return at tax time. The best strategy is to keep a spreadsheet or other ledger and record all side gig payments you receive throughout the tax year.
To help ensure you stay on top of your side gig income and tax obligations, the IRS offers the following guidance:
- Gig workers might be required to make quarterly estimated tax payments to help pay their income taxes throughout the year, including self-employment tax. This applies not only to federal income taxes, but also state income taxes in most states. The IRS has a Tax Withholding Estimator on its website to help you determine how much to withhold.
- Self-employed gig workers must pay all their Social Security and Medicare taxes on their income from the gig activity.
- Gig economy workers have two ways to cover their income taxes:
- Submit a new Form W-4 to their employer to have more income taxes withheld from their paycheck if they have another job as an employee.
- Make quarterly estimated tax payments.
It is important to make sure your worker classification — employee or independent contractor, for example — is correct. You can use the worker classification page on IRS.gov to see how you should be classified.
If you’re an independent contractor, you might be able to deduct business expenses, depending on the tax limits and rules. So it’s also important to keep records of your business expenses as well as your income.
More From GOBankingRates
- Ways You Can Lose Your Social Security Benefits
- Do You Have a Tax Question? Ask a Tax Pro
- The 10 Best Cash Back Credit Cards for 2023
- 6 Reasons Why You Shouldn't Procrastinate on Your Taxes
Daria Uhlig contributed to the reporting for this article.