A survey conducted by Pew Research in August 2021 found that 16 percent of Americans receive money through online job platforms. Following COVID-19, freelance work and employment in the gig economy are becoming more prevalent in providing the opportunity to earn full-time, additional, or part-time income. However, gig workers are not exempt from paying taxes. You must keep accurate records of your income and expense transactions and understand the tax implications of gig work.
What is Gig Working
The Internal Revenue Service defines gig work as an activity to earn money, outside of the bounds of full-time employment, using an app, online methods, or non-regular service provision to clients.
Some ways people are earning income, solely or in addition to other streams of income, which qualify as gig work, are through:
- driving a personal vehicle for rides and deliveries of goods, restaurant foods, and groceries;
- renting property, including a house, duplex, or room;
- selling online products;
- performing household tasks, such as cleaning, assembling furniture, or running errands;
- renting equipment;
- providing creative and professional services; and
- babysitting someone’s children or infant.
The list of gigs above does not include all forms of gig work but is the most common for gig workers and freelancers.
Tax Implications of Gig Work
Payments from part-time or temporary work paid in cash, property, goods, or cryptocurrencies must be reported to IRS. Even if gig workers do not receive a W-2, 1099-K, or 1099-Misc form, they must report their income. This is one reason why you should keep records and receipts and track income and expenses to file on your 1040 tax return. Practicing good record-keeping will help avoid overstating and understating earnings, which could result in paying too much or not enough taxes. Organizing and saving your receipts for allowed tax-deductible business expenses is necessary to reduce your tax liability.
Employers and businesses making use of gig workers must send the appropriate tax forms to IRS by the end of January each year. Those forms may include the following:
- 1099-K to report payment card and third-party network transactions;
- 1099-Misc for reporting miscellaneous income of $600 or more in rent, prizes, cash payments, and direct sales of $5,000 and up; and
- W-2 to report wages and withheld taxes for income, social security, and medicare.
New to the Internal Revenue Code is the change to the threshold when reporting card payments and third-party transactions. Instead of earnings totaling over $20,000, it is now reduced to over $600, regardless of the number of transactions. Additionally, the IRS converted the 1099-K and instructions from a yearly revision to continuous use, meaning that earning updates can be logged at any time.
How to File Taxes as a Gig Worker
Before filing taxes as a gig worker, you must have accurate record-keeping of all your financial transactions and tax forms from corporations and businesses. When it is time to file, be sure you provide the information to your accountant or tax practitioner. If you do not receive your W-2 and 1099 forms, contact the employer and businesses you work for to retrieve these. You have to report your earnings to the IRS using the 1040 federal income tax return and Schedule C form.
Accounting for Gig Work
Reliable accounting software, such as QuickBooks, is the best way for gig workers to record and track their earnings and expenses. If you work full-time as an employee and a gigger for additional income, your records must be accurate when reporting to the Internal Revenue Service. Neglecting to include your earnings for gig work on the 1099-Misc or 1099-K can have tax consequences with penalties. You may need a CPA or bookkeeper to set up various accounts on QuickBooks and maintain your records for financial transactions.
At Fusion, our CPAs can set up your recordkeeping on QuickBooks and provide bookkeeping services to help you optimize tax-deductible expenses. We help to ensure you are making timely and accurate submissions to the IRS to avoid tax penalties.
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.