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Attention, Gig Economy Workers: You Have to Pay Taxes!

Gig Workers Self-Employed Taxes Self-Employment Tax Planning
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Updated for tax year 2023.

You’ve probably heard that the gig economy is overtaking how we work — especially since the COVID-19 pandemic. But how extensive is this phenomenon that smashes the standard of the 9-to-5 job?

Between 2021-2022, the number of freelancers in the U.S. increased by 20%. More than 70 million Americans are now freelance workers. That represents 36% of the total U.S. workforce. And the number of freelance workers continues to rise — it’s projected over 90 million workers will be freelancers by 2028.

Who’s a gig economy worker?

A gig economy worker is also known as an independent contractor, a contractor, or a freelancer. If you fall into any of those categories, you’re self-employed and part of the vibrant small business community.

Some examples include:

  • A writer paid on per word basis
  • A graphic designer who charges based on an hourly rate
  • A wedding photographer charging a flat rate

Remember that “self-employment” includes any income you receive while in business for yourself. That means whether you work as a sole proprietor, independent contractor, or partnership member — even if only on a part-time basis — you should consider yourself self-employed.

Whatever the source of your gig economy income, once you pass certain threshold amounts you might have an obligation to file tax returns and pay taxes.

Why do you have to pay taxes?

When you work for a traditional employer, you instruct their payroll department on how much money to withhold for federal and state income taxes, if applicable. Your employer also determines how much to deduct for Social Security and Medicare taxes based on the current tax rates.

However, when you work for yourself, it’s your responsibility to figure out which taxes to pay, how much you owe, and when the deadlines are.

Do you need to file a tax return?

The key factor in determining if you need to file a tax return is the total amount of net earnings from your self-employment during the tax year.

Generally, if your net earnings are at least $400 (for 2023) you might have an obligation to file a return. Additionally, you’ll likely be on the hook for paying income and self-employment taxes for Social Security and Medicare.

What are estimated payments?

Unfortunately, your tax filing obligations as a self-employed individual aren’t quite as straightforward as they are for the traditionally employed. It’s not as simple as calculating your tax liability for the prior year and paying the IRS based on that amount.

As a general rule, the IRS requires anyone self-employed to pay taxes as they earn income.

While a regular 9-to-5 employer typically withholds taxes from their employee’s gross income, no one withholds taxes on your behalf when you’re self-employed. That means you’ll likely need to make estimated payments as you earn money to avoid tax penalties.

Who has to pay estimated taxes?

If you calculate that you will owe at least $1,000 in taxes, you typically are required to pay estimated taxes during the current tax year.

Additionally, you may have to pay if you owed any taxes in the prior year. That typically occurs if you had too little withheld from your traditional paychecks throughout the year or received supplemental income — like through your business — that increased your tax liability. In those instances, the IRS expects you to make payments to avoid future tax bills.

How do you calculate estimated tax?

Use the Estimated Tax Worksheet in IRS Form 1040-ES to figure out whether you must pay estimated tax. You’ll need to calculate this information:

  • Adjusted gross income
  • Taxable income
  • Taxes
  • Tax deductions
  • Tax credits

Read How To Calculate the Self-Employment Tax for more detailed information on calculating your payment. You can also check out the IRS Publication 505 (2017), Tax Withholding and Estimated Tax.

We also have a self-employment tax calculator you can use.

When do you pay estimated taxes?

Quarterly taxes are due on the following dates:

Payment Period Due Date
Jan. 1 – March 31, 2024 April 15, 2024
April 1 – May 31, 2024 June 17, 2024
June 1 – Aug. 31, 2024 Sept. 16, 2024
Sept. 1 – Dec. 31, 2024 Jan. 15, 2025

Note: The above dates can vary slightly each year due to holidays or if you are a fiscal-year taxpayer.

What if you don’t pay enough taxes?

If you don’t pay enough by the tax deadlines or skip a payment altogether, you might be charged an underpayment penalty. The IRS requires independent contractors to file and pay taxes on a quarterly basis even if you anticipate getting a refund at the end of the tax year.

Note: Different rules may apply to farmers and fishermen.

For more information

Keep in mind that you need to calculate your taxes based on your own business situation and recent tax law changes.

Check the IRS’s Small Business and Self-Employed Tax Center, or try out our self-employed tax software, which helps gig economy workers easily calculate estimated quarterly payments and file their tax returns each year.

This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.

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