Income From Gig Work? Here’s How Your Taxes Could Change
This article is presented for educational purposes only. For specific advice, please consult with a qualified tax professional.
Gig work is more common than ever. Adding a side hustle on top of a regular 9-to-5 is one way that many Americans balance rising costs with stagnant wages. And if you dipped your toes into the gig economy for the first time last year, your next tax return may be a little more complicated than it's been in the past.
How to File Taxes for Gig Work
Taxes for part-time gig work aren't all that dissimilar from how taxes are handled for full-time jobs. So you can take what you already know about filing your taxes and layer on the few additional steps and considerations.
You May Receive Additional Tax Forms
You may be familiar with a W-2, the tax form that employers send to employees. However, even if you found work through an app or company, you won’t receive a W-2 since you were a contractor rather than an employee. Instead, you may receive one, or several, of these forms:
If you made more than $600 with a client, the company or person that paid you should generally send you a 1099-MISC with the total amount you earned during the year.
If you sell goods through an online marketplace (like Etsy), your clients pay you via PayPal, or you find work through a website or app (like Lyft and Uber), you may receive a 1099-K with the gross amount you received. However, the IRS only requires companies to send you a 1099-K if it processes more than $20,000 worth of payments, and over 200 transactions, for your business.
A company may not send you a 1099-MISC if you made less than $600 during the year, or a 1099-K if you didn’t meet the criteria for that form. But, even if you don’t get a form, you still have to include the income you made on your tax return.
If you drove for Uber or Lyft, you may also receive both forms; a 1099-K for your driving-related income and a 1099-MISC for other income, such as referral bonuses. The Rideshare Guy has a guide to filing taxes which can show you where to find the information you’ll need (if you don’t receive a form), how to avoid overpaying, and potential mileage deductions.
You’ll Have to Fill Out a Schedule C
As a self-employed taxpayer (which is what the IRS considers you if you worked as a contractor), you’ll have to fill out a Schedule C. You’ll write in your business’s name, or you can leave that blank if you’re a sole proprietor and don’t have a business name. It’s also the form where you’ll list things like what type of work you do, how much income you made from all your clients, and your expenses.
You might have a Schedule C for each type of work you did, such as one for ridesharing driving and another for a different side gig. However, all your net profits (income minus expenses) will flow through to your Form 1040.
You Might Pay Additional Self-Employment Tax
When you’re an employee, you pay half your Social Security and Medicare taxes (FICA), and your employer pays the other half. However, when you’re self-employed, you have to pay both halves of the FICA taxes. Your tax software should do the calculations for you, but this may be one reason that it seems like you pay more in taxes on your side gig income than you do on income from a job.
You Could Be Eligible for New Deductions
There may be ways to decrease your taxable income from a side gig, saving you money when you file. For example, business expenses, such as supplies that you use to make products to sell on Etsy or Ebay, could be deductible. The cost of shipping and fees you pay for advertisements might also be acceptable business expenses.
The mileage deduction can be a big one for rideshare drivers, as you may be able to deduct 53.5 cents per mile that you drove while en route to a passenger or with a passenger in the car. For example, if you drove 1,000 miles each month, you may have $6,420 worth of business expenses to deduct for the year.
But not everything counts. For example, if you have a home office that doubles as a home gym that likely isn’t a deduction — home offices must be exclusively used for the business to qualify. Classes and other educational material can also be tricky. They may be deductible if you’re continuing your education or improving your skills, but not if you’re taking a course that will qualify you for a new business.
You can review the IRS site or check with an accountant if you’re unsure about a specific business expense.
Self-employed individuals may also be eligible for another deduction, even if they don’t have any business expenses. If you paid for health insurance, dental insurance, or qualifying long-term care insurance, and you weren’t offered or able to get coverage from your employer or a spouse’s employer, part of those premium payments may be deductible.
Consider Making Estimated Payments This Year
Having income from a freelance job or side gig can make your taxes a bit more complicated. Also, since taxes aren’t withheld from your paycheck, you may wind up owing some money this year or with a lower refund than you expected.
Going forward, you can make estimated state (if your state has income taxes) and federal tax payments online or by mail. In fact, if you expect to owe more than $999 in taxes next year, the IRS may charge you a small fine if you don’t make estimated payments at least quarterly. And, once you have an idea of what is and isn’t deductible, you can take steps during the year to minimize your tax bill next year.
Worried about an unexpected tax bill? MMI offers free, confidential financial counseling. We can help assess your situation, find appropriate resources, and provide direct advice on how to best overcome your unique challenge.