The gig economy in the United States is growing at a phenomenal rate that shows no signs of slowing down. That's the analysis of BMO Wealth Management.
A recent survey commissioned by the international wealth management company found that gigs — defined as jobs of short or uncertain duration — are the new normal.
BMO's findings appear to support Upwork's annual Freelancing in America study, which was released last October and predicts that freelancers will represent the majority of the U.S. workforce majority within a decade.
Why go gig? There are lots of reasons, both good and bad, why folks decide to freelance.
A major not-so-positive reason for freelancing is layoffs. Sometimes folks who've lost jobs find that freelancing or taking gigs is the only way they can earn money as they search for another full-time position.
Others take gigs even while being employed in a traditional job. In these cases, the freelance assignments help raise money for a special goal, such as raising a home down payment amount, paying off debt, going on a special vacation or supplementing retirement savings.
Others, however, embrace being their own bosses.
BMO's survey asked highly skilled professionals who chose to freelance or pursue project-based careers why they took that route.
Most said independence was a key motivator, followed by wanting new challenges or finding a purpose. Not surprisingly, BMO found that more millennials voluntarily made the choice to freelance, compared to older generations.
One thing, though, that all these new independent workers have in common is taxes.
Whether freelancing is your full-time, main source of income, or you're just taking a few gigs now and then for some extra cash, you'll likely owe income and self-employment taxes on the earnings.
Here are 5 tax matters for freelancers/gig workers to consider.
1. Know your new earnings form: As a full-time employee, you got a W-2. That annual earnings form not only told you how much you made, but also how much money your boss took out of your paychecks to cover, among other things, your federal and state taxes, as well as Federal Insurance Contributions Act (FICA) withholdings that go toward the Social Security and Medicare programs.
As a freelancer, you will receive, in most cases, a 1099 form for each of the separate jobs you completed for various clients. Yeah, you're asking about that "in most cases" phrase.
Technically, a payor isn't required by the Internal Revenue Service to send you a 1099 until you earned $600 or more. But that doesn't mean your five jobs that each paid $250 are tax free. Those payments are taxable earnings regardless of whether you got any documentation.
Also note that while you'll probably get a 1099-MISC, some places (typically ride-sharing and short-term home rental companies) issue Form 1099-K.
In either MISC or K cases or no 1099 at all, you still must report your freelance earnings.
2. Report gig income and deduct expenses: Once you get all your 1099s and totaled the amounts you made but didn't get documents for, you get to tell the IRS about it by April 15.
In most cases, freelancers operate as sole proprietors. Here you enter your self-employments income on Schedule C, which you submit along with your personal Form 1040.
In addition to noting your earnings on Schedule C, you also get the chance to deduct the expenses you incurred in completing your various gigs.
One survey a few years ago found that more than 70 percent of freelancers didn't deduct any expenses at all. That meant these folks paid too much tax.
To ensure that you're not one of these tax over-payers, keep track of all your business-related costs. They include such things as business mileage, other business travel, supplies needed to do your job(s), publications and advertising and marketing efforts. If you work from home, and a lot of sole proprietors to, don't overlook the home office deduction.
It's generally a good idea to set up a separate business bank account or at least get a credit card that you use only to cover your business expenses. The monthly and annual reports from these accounts will help ensure you don't miss any business expenses.
Just make sure, tough, that you claim only legitimate business expenses. These are costs that are necessary and ordinary to your line of work.
The IRS tends to scrutinize self-employed filers more since there's more chance for side hustle cheating, not that any of the ol' blog's readers would ever do that!
3. Pay your self-employment taxes: Remember those FICA taxes that came out of your old workplace paychecks? You now are responsible for those payments, both as the worker and the boss.
You owe self-employment taxes when you make more than $600 total in freelance earnings. They are figured on Schedule SE.
As a self-employed taxpayer, you now pay both the employer and employee portion of the SE tax. I know, bummer. But at least you get to subtract the employer portion on your Form 1040.
4. Pay your estimated taxes: Those SE tax amounts also are part of the calculation you need to make when you make your estimated tax payments.
Yep, as a freelancer, you now must make these four extra tax payments a year. They are due on April 15 (at the same time your annual return must be filed), June 15, Sept. 15 and the final one for the prior year on Jan. 15.
The reason, as noted in my estimated taxes primer, is that our tax system is pay-as-you-earn. That helps with Uncle Sam's cash flow. And while it's a pain, it also keeps you from facing a huge tax bill if you wait until April and make just one lump sum payment.
5. Take care of yourself: Since you're your own boss, you now are responsible not only for taxes, but also your health care and retirement.
Don't panic. There are some tax benefits here, too.
Any contributions you make to a qualified self-employment retirement plan can be deducted. However, you don't enter this amount on Schedule C. It's noted on your personal tax return as an adjustment to income, or an above-the-line deduction as it was known before the Tax Cuts and Jobs Act changes prompted revision of Form 1040.
The same is true for your payments now that you're self-employed for your medical coverage. Both your SE retirement contributions and health policy premium payments go on the new for tax year 2018 Form 1040 Schedule 1.
Whew! And that's just five tax-related things you must think about now that you are The Man or Woman.
But as a long-time freelancer, I can say the extra effort is worth it.
Like on this Friday, when as soon as I hit publish on this post, I'm taking the rest of the day off to enjoy a long weekend! Hope yours is great, too.
You also might find these items of interest:
- 4 tax tips for independent contractors
- Tax tips for the self-employed small business owner
- Actual miles or standard rate: which business driving method will cut your taxes more?