Tax time as a gig worker: prepping, budgeting, and more
Tax time is never fun for anyone, but swapping out W-2 employment for 1099 contract work comes with special tax considerations. Here’s what you need to know.
Whether you’re taking on contingent work as a side hustle or making it your full-time gig, you’ll want to know how it’s going to affect your taxes. You work hard for your money but… you still need to pay taxes.
Here are some important things you should know and how you can prepare and budget for tax time as a gig worker.
The IRS will likely treat you like a business
If you’re working for Postmates, Instacart, or Uber, you might feel like you’re just using those apps to make extra money or help you cover your bills during these tough times. But the IRS doesn’t view the aforementioned as your employers. That said, they’ll treat you and tax you like you’re a business.
According to The Tax Foundation, “Many gig economy participants are treated as sole proprietors for tax purposes, which differs from how employee wages are treated in the tax system.”
So even if you feel like “I’m not a business owner” or “I’m just doing this on the side,” in the eyes of the IRS, you’re an independent contractor or sole proprietor. That means you’re the business and you’re working with these apps as your clients. As a gig worker, you’re typically a 1099 contractor, which means you get no benefits and no taxes are taken out. Which brings me to my next point.
You have to take out your own taxes
When you first get paid for 1099 work it can feel something like this: “Sweet! Look at all of this money!” Not so fast. Since 1099 work doesn’t take out taxes for you, I’m sorry to report that, you’ll need to do that yourself. To avoid any tax trouble, you want to set aside money for your taxes so you’re not hit with an unexpected bill (been there, done that—it’s not fun!).
How much you take out can vary from person to person, but a good benchmark is to put away 30%. I know, I know, that’s a lot of money. Part of the reason it’s so high is that you’ll likely have to pay self-employment tax.
When you have a day job, your employer pays for half of your Social Security and Medicare taxes while you pay the other half. Being self-employed, you have to pay it all by yourself. Why? Because you’re both the employer and employee in this situation. The Self-Employment Tax to cover all of this is 15.3 percent, which consists of 12.4 percent going to Social Security and another 2.9 percent going to Medicare taxes.
And let’s not forget that on top of self-employment tax, you have federal and state income taxes as well. Where you can live can affect how much you pay in taxes as some states have no income tax, whereas states like California have the highest state income taxes in the country.
To make saving for tax time easier, consider opening a separate high-yield savings account. Every time you get paid, automatically transfer 30% to this account and don’t touch it until tax time.
You can deduct certain things to lower your taxable income
If you’re doing gig work, you might feel like it’s a huge burden to have to pay so much in taxes on your own. You might not even feel like a business owner. But if the IRS is going to classify you that way, the good news is there are some advantages.
As a business—which independent contractors and sole proprietors are—you can deduct certain business expenses. For example, if you drive for Uber you can deduct mileage.
For instance, according to Intuit TurboTax, “You can claim any other business-related mileage, such as the mileage you drove to ride requests, the mileage you drove after dropping off the passengers if you’re waiting for another ride, and the mileage you drove before rides were canceled. However, you must keep careful records of your off-trip mileage.”
On top of that, any other business-related costs can be deducted too. So if you spend money on bottles of water for passengers or mats for the car, those can be deducted as well. As a gig worker, you want to deduct as much as you legally can so you can lower your taxable income and pay less money to Uncle Sam.
Another way to reduce your taxable income is to open a health savings account (HSA), which allows you to save money for health-related expenses. Contributions are tax-deductible which can even further lower your taxable income.
Get your paperwork in order
As a gig worker, you should receive a 1099 form by January 31 from any company for which you provided your time and services. The 1099 form will show how much you were paid by the company.
Once you have all of your 1099s, you’ll typically report the income on Schedule C. Schedule C aka Form 1040 which is where you report both your income and expenses as a contractor/sole proprietor.
If you don’t get a 1099 form you still must report all the money you made. For example, if you made less than $600 with one of the apps they’re not obligated to send you a 1099 but the income still must be reported to the IRS.
You also want to have all of your expenses receipts organized so you can deduct as much as you can.
Being a gig worker can add more complications to tax time with more paperwork. But you want to use it to your advantage as much as possible by using qualified deductions with expenses and things like an HSA to lower how much you’re getting taxed on. Getting your documents in order and filing on time and making any necessary tax payments can help you stay in good standing with the IRS while you continue making money with your gig work.