Tax Tips for Gig Workers in 2021
Tax Tips for Gig Workers in 2021
Due to the historic pandemic, the freelancing market rose by 25% between April and June of 2020. Workers looking to supplement lost income, or find flexibility in an uncertain climate, turned to the gig economy for work opportunities.
Whether you are a long time gig worker or became an independent contractor for the first time last year, if you had net earnings of $400 or more as a gig worker in 2020, then you will need to file a tax return that reports this income.
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.
Employees automatically have their taxes withheld from their paycheck. But, independent contractors and gig workers do not. You must calculate and pay taxes on the income as you earn it, or incur paying costly interest penalties. Experts suggest that for every dollar you make, you set aside 30% to go toward income and self-employment taxes.
If you have a tax liability greater than $1,000 in the 2020 tax year (in other words, you owe more than $1,000 in taxes), your self-employment taxes should be paid on a quarterly basis to avoid penalties. 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.
You Are a Small Business
When you have an EIN or not, the IRS treats freelancers like small businesses. And, while yes, this means you owe taxes, there are some benefits as well.
As an independent contractor or self-employed individual, you may be able to deduct business expenses related to your work in the gig economy. 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.
Here is an example:
Troy earns $40,000. But, he is able to deduct $5,000 on his tax return for business expenses including vehicle expenses and moving equipment. He can deduct those expenses, meaning he only needs to pay taxes on $35,000 in earnings instead of the full $40,000.
In a 12% tax bracket, Troy is only required to pay $4,200 (12% of $20,000) as opposed to $4,800 (12% of $30,000). By properly deducting his business expenses,Troy lowered his tax burden and saved $600.
Business expenses can consist of an array of costs, including rent, insurance, office expenses, software and subscriptions, travel and more.
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.
- 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 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 do not receive a W-2, which is for workers categorized as employees.
You may receive a 1099-K if you use a platform or gig app. Most states require a 1099-K be sent if you have more than 200 transactions and $20,000 in earnings. Some states have a lower threshold.
If you do not qualify for a 1099-K, but made over $400, you are still required to report this income. Most app-based gig companies will provide their contractors with an earnings report for the prior year to assist them with their filing.
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:
GoShare has compiled these essential tax tips for gig workers in 2021 to assist our Delivery Pros and other gig economy workers with filing their taxes in 2021. We strongly recommend that you consult an income tax professional or certified public accountant before filing your taxes.
Looking for more tips? Check out these articles:
- Best Apps for Gig Workers Tracking Expenses and Mileage
- Gig Worker Tax Advice from CPAs and Experts
- Top Apps for Truckers in 2021
- The Perfect Side Hustles for Truck and Van Owners
- How to Find Independent Courier Jobs
- Truck Driving Jobs App for Drivers
- Box Truck Load Board
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.