Welcome to the exciting world of the gig economy, where flexibility meets opportunity — and more tax obligations.
In recent years, the gig economy has seen explosive growth, with more individuals opting for the freedom and autonomy of gig work. Whether you’re driving for a rideshare service, freelancing, or selling items online on a site like Etsy, it’s crucial to understand the ins and outs of filing taxes as a gig worker.
In this comprehensive guide, we’ll walk you through the essential steps to navigate the tax landscape as a gig worker, helping to ensure you stay on the right side of the IRS and make the most of the tax deductions available to you.
Getting started with gig taxes
Let’s clear up a common misconception — just because you’re not punching a clock from 9 to 5 doesn’t mean you’re exempt from taxes. You still need to pay taxes on gig income.
As a gig economy worker, you fall into the categories of an independent contractor or freelancer. This could be your full-time job, or it could just be a side hustle you use to supplement your primary source of income. Whether you earn gig income full-time or part-time, you’ll need to recognize yourself as self-employed and know how to pay taxes as a self-employed worker.
Paying these taxes as a self-employed individual involves estimated tax payments, a process more complex than the straightforward withholding done for traditional employees who receive a W-2. You must make estimated payments to avoid tax penalties as you earn income. We’ll go over this in more detail in the next section.
How should you file taxes for your new side gig? Let’s break it down.
If you have a side gig, you must report income as a self-employed individual, even if you have a full-time job. You’ll do this using a Schedule C form when filing your individual 1040 tax return.
The key factor in deciding whether you need to file a tax return for your gig income is your total net earnings during the tax year. Generally, you must file a return if your net self-employment earnings are at least $400. You’ll likely be responsible for paying income and self-employment taxes (Social Security and Medicare).
Accurate record-keeping will save you time and headaches when filing your income tax return. Apps used for side gigs often simplify income tracking and don’t forget ordinary and necessary small business expenses can be deducted. Collecting tax forms such as Form 1099-K or Form 1099-NEC is essential, as these documents will help you correctly report your gig income to the IRS. Always check these forms against your own records to ensure accuracy.
To ensure you file taxes accurately, especially with the added complexities of a side gig, you may benefit from using tools like TaxAct Self-Employed.
Determining your tax status
Understanding your tax status is a crucial step in the gig economy journey. But how can you tell whether you are self-employed?
The IRS generally considers you to be self-employed if you fit into any of the following categories:
- Independent contractor or freelancer
- Sole proprietor
- Limited liability company (LLC)
- Member of a partnership
Even if you work part-time for one employer while also freelancing for various clients, you still fall under the self-employed category. The distinction is crucial because self-employed individuals are responsible for managing their own taxes, unlike traditional employees whose employers withhold and remit taxes on their behalf.
While traditional employees receive Form W-2, freelancers receive Form 1099-NEC, Nonemployee Compensation, for projects or services earning at least $600. If paid through third-party platforms like PayPal, you may also receive Form 1099-K.
Navigating tax regulations for gig workers
Understanding Form 1099-K
Tax regulations are ever-evolving, and Form 1099-K has been a hot topic lately. Let’s dive into the recent changes in 1099-K reporting for tax years 2023 and 2024.
Previously, third-party payment platforms — like Venmo, Square, or Cash App — only reported to the IRS if you had at least 200 separate transactions totaling $20,000 or more in a calendar year. These thresholds still apply for tax year 2023. However, starting Jan. 1, 2024, payment apps must report business transactions totaling $5,000 or more to the IRS (with no transaction minimum). This $5,000 threshold is due to drop even more to just $600 in 2025.
This change will only affect you if you sell goods and services for profit, accept payment cards, or use third-party payment networks. If you use third-party payment apps for personal transactions, like reimbursing a roommate or sharing expenses with friends, you don’t need to worry about being taxed on those transactions.
It’s crucial to keep business and personal finances separate on payment apps and correctly report taxable income. This is especially important if you’ve recently entered the gig economy or haven’t received a 1099-K before.
Calculating and making estimated tax payments
As a gig worker, you are responsible for ensuring that taxes on your net earnings are paid to the IRS, a crucial aspect of which is the self-employment tax (SE tax). The self-employment tax rate is 15.3%, covering your Social Security and Medicare taxes. The Social Security tax rate is 12.4%, applicable to earnings up to $160,200 in 2023, while the Medicare tax rate is 2.9%, without an earnings limit.
The SE tax impacts anyone self-employed. Even if you have a traditional employment arrangement but earn income through a side hustle, you are likely required to pay SE tax on those side hustle earnings. However, you can report half of your self-employment tax as an adjustment to income on your tax return, thereby reducing your AGI and the corresponding income tax.
If you need help calculating your SE tax, our self-employment tax calculator is a useful tool. TaxAct® can also help you pay your estimated taxes online using Electronic Funds Withdrawal. With this method, you have quarterly payments deducted from your bank account automatically when quarterly taxes are due.
Hobby income vs. gig income
Is your side gig a hobby or a bona fide business? The tax implications vary, so let’s learn how to tell the difference.
Here’s the gist: If your side gig is a business, you can claim tax deductions for things like startup costs, travel, and internet bills. But if your side gig is just a hobby, you won’t be able to claim tax deductions to offset associated costs.
Knowing if your gig is a hobby or a legit business involves knowing the IRS distinctions. Generally, for your side gig to meet IRS business guidelines, you should have made a profit in at least three of the last five consecutive years. You also need to look at whether you treat your side gig like a business, put in the effort to turn a profit, and depend on your side gig income to get by. If the answer is yes to any of those questions, you’re likely running a business. If you’re just doing it for fun and not intending to make a profit, it’s probably a hobby.
Hobby income still gets hit with income tax, but you won’t need to pay SE tax on hobby earnings.
Maximizing tax deductions and tax benefits
Gig work often comes with unique expenses. If you’re a gig worker seeking to maximize your tax savings, it’s crucial to be aware of what tax deductions are available to you. Some common ones that might apply to you include:
- Self-employment tax deduction: You can deduct 50% of SE tax owed.
- Home office deduction: To claim this deduction, you must use a portion of your home exclusively for your gig work. This allows you to deduct a percentage of related expenses like rent, utilities, real estate taxes, or insurance (you calculate the deductible percentage based on the square footage of your home office).
- Business startup and organizational costs: Immediately deduct up to $5,000 each in business startup and organizational costs if you spent less than $50,000 total.
- Retirement contributions: You can deduct contributions made to a Simplified Employee Pension (SEP) IRA with a 2023 contribution limit of $66,000. Traditional IRA contributions are also deductible, with 2023 limits at $6,500 ($7,500 for 50 and older).
- Health insurance: You can deduct health insurance premiums if you are self-employed and paying for your coverage (eligible for medical, vision, dental, and qualifying long-term care insurance for you, your spouse, and any dependents under 26).
- Vehicle expenses and business travel: Deductible vehicle expenses include fuel, maintenance, repairs, insurance, and depreciation when used for business purposes. Business travel costs, such as hotel, airfare, and meals (50% deductible), can also be deducted.
- Other business expenses: Deduct ordinary and necessary business expenses like office supplies, business equipment, furniture, advertising, and internet expenses.
Maximizing these deductions as a freelancer or gig worker can significantly reduce your tax liability, allowing you to keep more of your hard-earned money.
Tax deductions for Uber and Lyft drivers
Rideshare drivers and delivery drivers, this one’s for you. When navigating the gig economy as a Lyft driver, Uber or Uber Eats driver, Postmates driver, Instacart driver, Grubhub driver, or DoorDash driver, it’s not just about getting passengers or food from point A to point B. Understanding the intricacies of tax deductions specific to your role is crucial for maximizing your earnings and staying tax-compliant. Here’s a guide to help you make the most of specialized tax deductions for rideshare drivers and the best practices for documentation:
- Mileage deductions:
- Best practice: Keep a meticulous record of your business-related miles.
- Documentation: Log every mile driven for work purposes. Use apps like MileIQ for accurate mileage tracking.
- Tax benefit: Deduct the standard mileage rate for each business mile, covering expenses like gas, maintenance, and depreciation.
- Car-related expenses:
- Best practice: Save all receipts for car-related expenses.
- Documentation: Keep records of expenses such as service and repairs, car payments, insurance, tolls, and parking fees.
- Tax benefit: These expenses can be deducted on Schedule C, reducing your taxable income.
- Cell phone expenses:
- Best practice: Designate a portion of your phone usage to business activities.
- Documentation: Keep detailed records of your business-related phone calls and internet usage.
- Tax benefit: Deduct a portion of your cell phone bill as a business expense.
- Vehicle depreciation:
- Best practice: Understand the rules for depreciating your vehicle.
- Documentation: Maintain records of your vehicle’s purchase price and any improvements made.
- Tax benefit: Deduct a portion of your vehicle’s depreciation yearly, spreading out the cost over time.
By diligently documenting your expenses and leveraging specialized tax deductions, you can minimize your tax liability and ensure a smoother tax filing process. Stay organized, use technology to your advantage, and claim all eligible deductions to maximize your rideshare business.
Special considerations for gig economy members (rideshare drivers)
There are several often-overlooked tax deductions for rideshare drivers that can significantly impact your bottom line. Don’t forget about these potential tax breaks if you’re a Lyft or Uber driver:
- Passenger amenities:
- Deduction: Snacks, water bottles, and extra phone chargers provided for passengers can be tax-deductible.
- Best practice: Keep detailed records of the expenses, such as receipts, to substantiate these deductions. Categorize them separately for easy identification during tax preparation.
- Fees and commissions:
- Deduction: Any fees or commissions charged by the rideshare platform, as listed on your 1099 Form or driver dashboard, are deductible.
- Best practice: Regularly review your 1099 Form and online account for a comprehensive list of fees. Document these figures meticulously to ensure accurate deduction.
- Vehicle cleanliness:
- Deduction: Car washes, upholstery cleaning, and air fresheners contribute to maintaining a clean ride and are considered tax-deductible.
- Best practice: Keep receipts for all cleaning-related expenses. Consider creating a separate folder or digital archive to organize and track these deductions.
- Cellphone expenses:
- Deduction: If you have a separate phone or phone line exclusively for business, it’s deductible. You can also deduct a percentage of personal phone expenses if you use your personal phone for rideshare purposes.
- Best practice: Maintain a log of business-related calls and expenses. Utilize online phone service records to retrieve information for tax reporting easily.
- Roadside assistance:
- Deduction: Membership fees for services like AAA, ensuring a safe ride for passengers, are tax-deductible.
- Best practice: Document the membership costs and clearly indicate their association with your rideshare business. This ensures you claim the appropriate deduction during tax filing.
Proactively plan for these lesser-known deductions and maintain meticulous records to reduce your taxable income and take advantage of all tax benefits available to you as a rideshare driver.
The bottom line
Filing taxes as a gig worker doesn’t have to be scary. You can ensure a smooth and financially savvy tax season by understanding your tax obligations, navigating tax regulations, and maximizing tax deductions.
Remember, staying informed and compliant with tax regulations is a continuous process. As you embark on your gig economy journey, don’t forget to leverage resources like TaxAct® to streamline your tax filing experience. By doing so, you’re not just managing your taxes — you’re optimizing your financial success in the gig economy.