If you had net earnings of $400 or more as a gig worker in 2019, then you will need to file a tax return that reports this income. Being a gig worker or freelancer means your strategy when paying taxes will differ from that of an employee.
GoShare has compiled these essential tax tips for gig workers in 2020 to assist our Delivery Pros and other gig economy workers with filing their taxes in 2020.
We strongly recommend that you consult an income tax professional or certified public accountant before filing your taxes.
Independent Contractors vs. Employees
Being a gig economy worker often means that you are an independent contractor, or self-employed. As an independent contractor, you will need to pay taxes differently than workers classified as employees.
As an employee, your employer will withhold federal income, Medicare and Social Security taxes from your paycheck. If you are an independent contractor, then your taxes are not withheld from your paycheck. Instead, you must pay taxes on the income as you earn it, or incur paying costly interest penalties.
If you have a tax liability greater than $1,000 in the 2019 tax year (in other words, you owe more than $1,000 in taxes), your self-employment taxes should be paid on a quarterly basis. Keep track of and pay by these due dates to avoid a penalty: April 15, June 15, September 15, and January 15. Failure to make these quarterly estimated tax payments on time will result in substantial interest penalties.
Business Expense Deductions
As an independent contractor or self-employed individual, you may be able to deduct certain expenses relating to operating your business. A business expense is considered to be both “ordinary and necessary” to completing your job.
By deducting your business expenses, you can effectively lower the amount of tax you owe.
How is this possible? Consider the following scenario: Dave earns $30,000. But, he is able to deduct $10,000 in expenses on his tax return. This means he only needs to pay taxes on $30,000 minus his $10,000 in deductible expenses, instead of the full $30,000.
In a 12% tax bracket, Dave is only required to pay $2,400 (12% of $20,000) as opposed to $3,600 (12% of $30,000). By properly deducting his business expenses, Dave is lowering his tax burden and saving $1,200.
Business expenses can consist of an array of costs, including rent, insurance, office expenses, software and subscriptions, travel and more.
Deducting Vehicle Expenses
One of the most common deductions made by those working in the gig economy is for vehicle expenses. If you are a Delivery Pro on the GoShare platform, work with a rideshare platform, or use your car for other business purposes, you may be eligible to deduct vehicle expenses related to your freelance work.
In order to qualify, your vehicle must be used for business activities. Vehicles used as equipment, such as dump trucks, may not apply as an expense in this deduction category.
In order to appropriately deduct vehicle expenses, most accountants recommend one of two methods:
- Deduct actual operating expenses including gas, maintenance, insurance, and depreciation. Keep in mind, if you also use your vehicle for personal use, you are not able to deduct the full cost of maintenance, insurance, and depreciation. For example, if 80% of the vehicles use is for personal driving, and 20% is business, only 20% of the costs of maintaining and insuring your vehicle can be deducted on your returns. The cost of gas should only be deducted for gas used during business-related activities.
- Deduct a standard rate on each “business” mile you drove in the past year. As long as you’ve got a good mileage tracker, this method can be easier to calculate for freelancers than the actual operating costs. See our mileage tracking app recommendations here. Deduct a standard rate for each mile driven in the course of your business and work activities. For miles driven in 2019, the standard mileage rate for computing deductible costs is 58 cents per mile. For miles driven in 2020, this rate will go down to 57.5 cents per mile.
Keep Your Receipts
In order to take a tax deduction, the IRS requires that expenses be documented. Make sure to keep records of the money you receive from gig work and save receipts of your expenses.
By tracking all the income received and expense incurred, you will have a much easier time with filing taxes once tax season arrives. This record-keeping may also be required to verify the accuracy of your deductions if you get audited.
The IRS requires you to keep receipts or expense documentation for:
- Business travel or entertainment expenses
- Charitable contributions
- Mileage records
Taxes are a complicated subject, so don’t hesitate to reach out to a local tax professional if you are feeling overwhelmed. By consulting with a professional, you will be able to identify any missing deductions and ensure that every avenue is properly accounted for when filing taxes.
Paperwork and Filing Requirements
Independent contractors will receive a 1099-MISC in January, as opposed to a W-2 for workers categorized as employees. Any client that paid you $600 or more during the year is required to send you this form. The 1099-MISC will show your total earnings from that client. You will not receive the 1099-MISC if you earned less than $600, but you are still required to report those earnings as taxable income.
You may receive a 1099-K if you use a platform or gig app to work for many individual clients. The platform and their payment processor will provide a 1099-K if you have more than 200 transactions and $20,000 in earnings.
To file your annual return, you will use Schedule C to report income or loss. If your expenses were less than $5,000, you may be able to use Schedule C-EZ instead.
Use the Schedule SE and Tax Form 1040ES to calculate and remit your income, Medicare, and Social Security taxes.
Do Your Research
These general tax tips for independent contractors and gig worker taxes can help guide you toward the right path for successful tax filings, but every situation is unique. You may have capital costs from starting up a business or personal and family expenses that influence how you handle your tax filings. Keep these tips in mind while you do your own research online. Speak with an income tax professional or certified public accountant before filing your taxes to ensure you are reporting correctly.
To get started, take a look at these websites that contain further information on taxes for independent contractors and gig workers:
Looking for more tips? Check out these articles:
- Tax Tips for Gig Workers in 2019
- Top Tips for Gig Workers in 2020
- Advice for Small Businesses in 2020
- How to Find Moving Leads for Your Business
- Top 5 Reasons to Drive for GoShare
GoShare Inc. and our affiliates do not provide tax, accounting or legal advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.