Posted on April 4, 2016 in Advice
Tax FAQs for Gig Economy Workers
It goes by many names: gig economy, sharing economy, on-demand economy. No matter what you call it, a growing number of people are taking advantage of digital platforms like Uber, AirBnB and TaskRabbit in order to boost their incomes. Recent data estimates that 3.2 million Americans already participate in the gig economy, and that number is expected to grow to 7.6 million by 2020.
Having a side hustle can be a great way to pay down debt and save money, but with tax day quickly approaching, you may be wondering what that additional income means for your tax return. Whether you’re renting out an extra bedroom, working as a part-time chauffeur, or delivering groceries on the side, you’re officially part of the gig economy—and your tax situation will likely reflect that.
If this is your first year filing taxes as a gig economy worker, here are a few FAQs and answers to ease the process.
How do I know if I’m part of the gig economy?
The definition of “gig economy” is somewhat loose, but the basic idea is that you receive income as an independent contractor. Since you’re not an employee, you don’t enjoy traditional benefits like health insurance and a 401(k) plan, and taxes are not automatically withdrawn from your paychecks.
The biggest clue you’re a gig economy worker? Your income is reported on a 1099 vs. a W-2 (the meaning behind yet another name for it—the 1099 economy).
If taxes aren’t withheld from my check, how do they get paid?
One of the biggest surprises for new freelancers is the reality of paying taxes four times per year. If you expect to owe $1,000 or more in federal taxes—and that’s a pretty easy mark to hit—the IRS requires you to make quarterly estimated tax payments.
“It doesn’t sound like the sexy thing to do with your new income, but you have to brace yourself for Uncle Sam,” writes Erin Lowry at TaxAct. “It’s important to keep tabs on all your earnings and to set aside a portion of each freelance paycheck for taxes.” If you neglect to submit your quarterly tax payment, the IRS may impose an underpayment penalty—and you risk spending through your income and being hit with a big tax bill you can’t pay come April 15th.
Lowry suggests setting aside at least 25 percent of each freelance paycheck for taxes, or you can use the estimated tax worksheet included with the IRS form 1040-ES to come up with a more definitive number.
Can I deduct “business” expenses as a freelancer?
Yes—and if you don’t, you’re probably leaving money on the table.
Freelancers can deduct expenses related to the service they provide, whether that’s gas for an Uber ride or sheets for an Airbnb guest bedroom. Other deductions for freelancers can include computers, phone connections, Internet services, office supplies, and other items, depending on the type of business. Check out the list of common freelancer tax deductions over at the Freelancers Union for more ideas.
An easy way to keep track of these expenses throughout the year is to set up a separate business checking account and run all your gig-related expenses through that account. “If you do nothing else for your business, opening a separate business checking account is a must!” says Carrie Smith at Careful Cents. “By separating your business transactions you create a line between professional and personal. This is especially handy come tax time when you create year-end reports.”
Should I pay someone to help me with my taxes?
If you can afford it, hiring an accountant can help reduce stress and teach you the ropes of filing taxes in the gig economy—especially if it’s your first year doing it.
Unfortunately, hiring a CPA isn’t always in the cards, and if you’re willing to do a bit of extra legwork you can save that money and add it to your side hustle account. Tax programs like TaxAct are a lower cost option, and guides you through the process with helpful tips along the way.
And if you make less than $54,000/year, you may be eligible for free tax assistance from the Volunteer Income Tax Assistance (VITA) program.
Anything else I should know?
With the rise of the gig economy, a number of tools have popped up to help freelancers manage their finances—some of these can be really helpful when it comes to preparing for and doing taxes. For example, Freshbooks is a low-cost invoicing platform that also allows you to track and manage expenses. And when you’re ready for bookkeeping help at less-than-typical bookkeeping prices, Bench offers a simple, low-cost monthly solution.
And if you need help with those quarterly estimated tax payments, Dobot can help. Download the Dobot mobile app and start setting aside money before you can spend it (or miss it).
Because you have enough to think about, right?