Don't Mess With Taxes

Photo by Karolina Grabowska

Gig jobs boomed during the COVID-19 pandemic. While the luster of these on-demand services has dimmed somewhat, plenty of people still look to these non-traditional ways to make money.

Many use the gig economy to supplement their regular wages. Others like the flexibility of being an independent worker and make gig work their full-time job.

But in all situations, what these workers don't like is having to take care of the gig economy's additional tax responsibilities. In fact, tax evasion, often inadvertent, is often a side effect of side hustles.

Here are some tips to make sure you don't run afoul of the Internal Revenue Service.

Gig earnings are taxable: Regardless of the type of on-demand work you choose, the earnings are taxable and must be reported as income on your annual tax return.

That includes money for which you get an official earnings statement (usually some version of a 1099, such as 1099-K or NEC), as well as payments that aren't reported to you (and the IRS).

As for those statements, things sometimes can get confusing. Especially lately.

The American Rescue Plan Act (ARPA) of 2021 dramatically reduced the income level at which third-party, e-commerce payment platforms — such as eBay, PayPal, Etsy, CashApp, and Venmo — must issue 1099-K forms to sellers who got money through them. It was set to drop this year from $20,000 to $600.

The IRS delayed that requirement, and some lawmakers are looking to reverse the ARPA change and increase the 1099-K earnings reporting trigger.

The ultimate responsibility, however, falls on the gig worker. Regardless of how you are paid — via cash, credit card, property, goods, or virtual currency — you need to keep accurate records of all those earnings.

Then you most likely need to make estimated tax payments, usually in four equal amounts throughout the tax year. If you don't you could face late- and/or under-payment penalties.

And don't forget about self-employment tax on your gig money. This is the independent worker's way of paying required Social Security and Medicare taxes on your gig income.

Make sure you’re properly classified: Most gig workers are independent contractors. That's why they must deal with the tax tasks just discussed in the previous section.

Typically, gig workers are considered as independent contractors by digital platforms that match workers' services with customer needs.

But sometimes, these contracted jobs are not so clear-cut. In some cases, companies that hire individuals as contractors actually should be paying them as employees.

The IRS has conditions that determine whether the job you're doing is as an employee or independent contractor. A key factor is the amount of control you have over completion of the job. Check out the other worker classification conditions in my post on IRS employee or contractor guidelines.

From a tax standpoint, if you are an independent contractor, you may be able to deduct a variety of business expenses. Again, good records are key to using these expenses to lower your taxable income.

You can find more on gig work taxes at the IRS' special Gig Economy Tax Center online page. You also might find these blog posts of interest:

• Estimated taxes: Why, when, and how to pay them
• Got more than wage income? Here's how to report it.
• Paying self-employment taxes on the revised Schedule SE

And if you're still investigating what type of gig work to get into, you also should read the GoBankingRates' story 5 Side Gigs To Avoid at All Costs.

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