May 30, 2018 11:35 pm

5 Tax Things to Know about Your Gig

A study in 2017 (https://www.upwork.com/press/2017/10/17/freelancing-in-america-2017/) found that an estimated 57.3 million Americans now work in the gig economy, driving for Uber or Lyft, performing chores through TaskRabbit, or being independent contractors and freelancers on their own or through other Internet platforms. Some do this part time; others do it full time. Either way, if you are part of the gig economy, there are tax obligations you need to know if you want to make it work.

1.  Report all of your income

All of your business earnings should be reported on Schedule C of Form 1040. This includes earnings reported on Form 1099-MISC, tips, and other payments you receive—in cash, check, credit/debit card, PayPal or other electronic payment—in the course of your work. There is no minimum amount of income exempt from reporting.

Recognize that you don’t necessarily pay tax on all of these earnings. You can reduce the amount subject to tax by claiming deductions for various business expenses. For example if you need a license to perform your work, the cost is a deductible expense.

2.  Pay self-employment tax

For those who are employees, Social Security and Medicare (FICA) taxes are covered by withholdings from paychecks and a like payment by employers. For self-employed individuals, these taxes are on you (Schedule SE, Form 1040). Self-employment tax covers what would be both the employer and employee share of Social Security and Medicare taxes. One half of self-employment tax (the “employer” share) is deductible as an adjustment to gross income; itemizing isn’t required.

If you have a job in addition to your self-employment, the Social Security taxes you pay through your job are taken into account for self-employment tax purposes because of the overall limit for Social Security taxes ($128,400 in 2018). However, because there is no cap on earnings for Medicare taxes, all of your self-employment earnings factor into this portion of self-employment tax.

3.  Pay estimated taxes

Employees usually cover their tax obligations by withholding from paychecks, but those working in the gig economy don’t receive paychecks. It’s up to you as a gig worker to pay your taxes throughout the year (if you wait until you file your return to settle your entire tax bill you likely face a tax penalty). This means making estimated tax payments four times for the year. For 2018, these payments are due April 17, 2018, June 15, 2018, September 17, 2018, and January 15, 2019.

Estimated taxes should cover your income tax, self-employment tax, and any other federal taxes you owe (e.g., additional Medicare tax on earned income and/or net investment income). Be sure to set aside funds from your earnings to have enough to pay estimated taxes when they come due.

You can avoid paying estimated taxes if you have another way to submit taxes throughout the year. This may be possible if a working spouse increases his/her withholding to cover your taxes. Of if you have a full-time job, your wage withholding can be adjusted to cover the taxes on your gig work.

4.  See to your own benefits

When you work in the gig economy, there’s no employer to provide you with benefits, such as health insurance, retirement plans, or education assistance. In some cases, you may enjoy benefits through a spouse’s employer or through your full-time job. But otherwise, these benefits are up to you.

As a self-employed person, you can use various types of retirement plans to save for the future. For example, if you use a SEP-IRA, you can set aside roughly 20% of your earnings each year. The portion you set aside isn’t currently taxed (i.e., you’re sheltering some of your profits) and over time you’ll build up a sizable nest egg for the future.

5.  Keep good records

When you work in the gig economy as a self-employed person, in the eyes of the tax law you’re in business. As such, you are required to keep books and records to track your income and expenses. Today, this requirement is easily met using software or apps for this purpose. Having this information allows you to prepare your tax return and to know how well your efforts are paying off.

Good recordkeeping is the key to maximizing legitimate business write-offs. For example, if you drive your personal car or truck for business, you can deduct the cost of business usage…but only if you have good records of this business driving.

Conclusion

Working on your own can mean an unlimited upside to your earnings. But it also entails tax responsibilities. The IRS has a landing page for the sharing economy (https://www.irs.gov/businesses/small-businesses-self-employed/sharing-economy-tax-center) that provides links to a number of subjects to help you when you work in the gig economy.