Whether it’s driving people to their destinations, delivering dinner, or writing code for websites, many U.S. citizens are making a living through the gig economy.
The gig economy is a labor market built on hundreds of thousands of small, one-time jobs. According to Statista, there were 57.3 million freelancers working in the U.S. in January of 2021. With such a significant portion of U.S. adults earning a living in this way, many are wondering how exactly taxes work when you are a part of the gig economy.
In this article, we’ll quickly cover some of the essentials. If you are a freelancer or are considering freelance work, this is for you.
What counts as gig work?
According to the IRS Gig Economy Tax Center:
Gig work is certain activity you do to earn income, often through an app or website (digital platform), like:
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Sell goods online
- Rent equipment
- Provide creative or professional services
- Provide other temporary, on-demand or freelance work
This is not an exhaustive list. Some other work may fall under taxable gig work. However, this covers some of the most popular ways people earn income through the gig economy.
Those who earn an income through the gig economy are considered self-employed and will have to pay self-employment tax if they earn over a certain dollar amount.
How much can a freelancer earn before they have to pay taxes on that income?
If your net earnings (gross earnings minus expenses) are more than $400, you will need to pay self-employment tax. Currently, the self-employment tax rate 15.3% — 12.4% for social security and 2.9% for Medicare.
How do you file taxes as a freelancer?
Freelancers do not receive W-2s like workers in traditional employer-employee relationships would. Instead, freelancers who work with one specific platform (e.g., someone who works exclusively with Uber) might receive a 1099-MISC or a 1099-K.
Freelancers who take work from many different sources (e.g., a freelance writer who works on multiple platforms, by word of mouth, and through website orders) might not get any form at all because the income from each individual client is low enough that it is not required. In these situations, you must rely on recordkeeping to accurately report income and fees.
With all the necessary records and forms, freelancers typically fill out the following forms:
- Form 1040 or 1040-SR (for seniors)
- Schedule SE (self-employment tax)
- Schedule C (profit or loss in a sole proprietorship)
How do tax deductions work for freelancers?
One way to offset the amount owed in taxes is to ensure that all expenses are accounted for as deductions. Deductibles can include:
- Costs for meeting clients, such as meals, lodging, transportation, or other required items
- Necessary supplies for a home office, including appliances, office supplies, home office space, or internet connection (deducting the percentage used for business vs. personal use)
- Training or certification costs
- And more
Research deductions for your specific type of work to see what you qualify for.
Navigating taxes as a freelancer in the U.S. is tough, and it requires some planning. For the smoothest tax season, you need to keep accurate records, and you might consider setting aside a portion of your income for taxes as you earn it.
Once it’s time to file, you might also want to work with a professional to ensure that you are filing correctly and that you can get the most from your deductions.
You can find additional information on Business Insider.
