In case you were wondering if your side gig income is taxable, the IRS sent out a little reminder this week that it is.
In a June 27 memo on its website, the IRS said “earnings from gig economy work is taxable, regardless of whether an individual receives 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 for your gig work are supposed to send you a Form 1099-K. However, this only applies if the total income you received from a specific company exceeded $600 in 2022, regardless of the total number of transactions.
Because of the rules, you might not receive a Form 1099-K or any other information return for 2022. This means it’s up to you to keep up with all of your side gig income during the tax year so you can file an accurate return the following tax season. 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 who aren’t considered employees 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.
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It is important to make sure you are properly classified as a taxpayer, such as an employee or independent contractor. 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.
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