Gigs aren't just for musicians anymore. Now millions of folks are earning a living with side gigs. So many in fact that there's a whole "Gig Economy." Even the IRS is hip to it. They've created a special website just to educate new gig workers. So what is the Gig Economy and why is the IRS so interested?
Gig workers are independent contractors active in a wide range of businesses, many of which involve digital platforms. Uber drivers, Etsy shop owners, Airbnb operators and social media influencers are gig economy workers. On demand consultants, graphic designers, coders, writers, network marketers are gig workers. Maybe they've left traditional office jobs or maybe they are working gigs on the side, but what they all have in common is they're considered self-employed.
If self-employment at any level is new to you, here are are just a few basic things you should consider when it comes to the IRS, taxes, and business practices.
Recordkeeping: Keeping accurate records is critical for any business large or small. The IRS doesn't require a particular records system, just one that clearly shows your income and expenses. There are a number of affordable accounting software packages out there for gig businesses including Quickbooks Online, Xero, and Wave. There are free templates available too for Google Sheets and Excel-based recordkeeping, and don't forget the tried-and-true paper ledger systems from Dome and others.
Income: Whether Venmo payments, credit card receipts, cash tips, checks, even barter, all your gig income must be recorded and declared. At year end, you'll likely receive different 1099 forms which will need to be reconciled. A separate bank account is highly recommended so as not to co-mingle your gig and personal finances.
Update: If you've never heard of a 1099-K form, you probably will soon. The recent American Rescue Plan Act changed the reporting thresholds for Payment Card and Third Party Settlement Organizations (the companies that process credit card transactions). Instead of $20,000 in charges and 200 aggregated transactions, the new single threshold for issuing a 1099-K is now just $600 So for example, if you are a Lyft driver accepting credit cards for payments or you sell stuff on eBay, there's a good chance you'll be receiving a 1099-K this year.
Expenses: As with income, you need to carefully record your business expenses. When it comes time to prepare your taxes, the IRS will be scrutinizing typical expense deductions for gig workers like mileage and home office expenses. You must be able to support your expense deductions with documentary evidence and show they are all business related and not personal.
Self Employment Tax: As a self-employed individual, your net profits are subject to a 15.3% self-employment tax in addition to regular income tax. You deduct one half of your self-employment tax when you prepare your taxes and calculate your profit. Still, it's important to understand and be prepared for the tax liability arising from your gig, and budget accordingly. You don't want to be surprised with a large tax bill and no cash to pay it. Typically if you calculate you will owe more than $1,000 in income tax for the year, you are required to make estimated tax payments.
Estimated Tax Payments: Taxes are a pay as you go system. As you receive income throughout the year, you are supposed to pay taxes throughout the year. If you've always been a regular employee, you're familiar with income and payroll tax withholdings. As a self-employed gig worker, you don't usually have taxes withheld. Instead, the IRS expects you to make quarterly estimated payments for the taxes you owe. If you don't make estimated payments or you underpay, you will be assessed a penalty when you file your tax return. The IRS maintains a comprehensive online resource for gig workers to estimate their tax liability and to make online payments.
If you're one of the millions of Americans who are part of the new Gig Economy and are self-employed for the first time, congratulations are in order! Hopefully some of this basic information is useful. At Monadnock Tax Services we are happy to help small businesses and entrepreneurs of any size with friendly tax advice and services. Give us a call at (603) 722-0184 or email info@monadnocktax.com