The gig economy has altered how people conduct business and offer services in recent years. Whether from part-time, temporary, or side work, taxpayers must record their gig economy earnings on their tax returns. To assist this group of workers and entrepreneurs in understanding and fulfilling their federal tax obligations, the IRS Gig Economy Tax Center offers resources and information.
Employees disclose their earnings based on the classification of their job.
Workers in the gig economy who provide services like driving a car for someone else, running errands, and other on-demand labor need to be correctly categorized. Classification assists the taxpayer in figuring out how to disclose their income correctly.
- They disclose their wages from the Form W-2, Wage, and Tax Statement if they are employees.
- They file their income on a Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) if they work as independent contractors.
Whether a service provider is a worker or the company or platform decides an independent contractor. The IRS.gov worker classification page provides business owners with assistance in accurately classifying workers and independent contractors.
Business owners can use IRS.gov to accurately classify workers and contractors.ax advantages for independent contractors
An increasing number of workers entering the gig economy over the last ten years has made it possible to make a living other than by accepting a payment from an employer. While many people who work for themselves also do it full-time, many who do so on the side do so part-time in addition to another job. A gig might have many advantages, such as flexible work hours, higher earning potential, or the chance to earn money from several firms using your unique expertise and talents.
Thanks to the Affordable Care Act’s health care policy improvements and tax reform, individuals now have greater financial freedom to pursue their artistic endeavors. Many people in this line of work have access to numerous tax benefits that are well worth being aware of, whether through ongoing freelancing or side ventures.
Deductions for independent contractors that pass through
Gig workers were able to deduct several self-employment expenses before the tax change. With a pass-through deduction on qualified business income (QBI) for qualifying enterprises, the reform improvements now frequently allow businesses to lower their tax liability.
Whether they itemize or not, most independent contractors and small business owners can deduct up to 20% of their QBI from federal income tax (but not self-employment tax) thanks to a tax code feature officially known as the Section 199A deduction.
The deduction amount is determined by adding the business’s revenue to the taxpayer’s total taxable income, which includes interest, capital gains, and wages, among other things. The type of business also becomes relevant in 2022 after the taxable income reaches or surpasses $170,050 ($340,100 if filing jointly).
Tax on self-employment
One disadvantage of being an independent contractor is paying the employer and employee’s share of Social Security and Medicare taxes due to self-employment. This amounts to 15.3% of your covered earnings, but the IRS permits self-employed gig workers to deduct half of that amount from their income when determining their taxable income. In essence, self-employed individuals are eligible to deduct from their income taxes up to 50% of the amount they pay in self-employment tax. As a freelancer, it is way more efficient and easier to use paystubs online to access your income report quickly. A $1,000 payment toward self-employment taxes, for instance, lowers taxable income by $500.
Reforming worker classification
Before the tax reform, you would typically pay more in taxes if you declared yourself an independent contractor, even though your income was the same as an employee’s. Pass-through deductions and other new provisions in the tax code altered that for many people during the tax reform.
You must evaluate the nature of your employment before being considered an independent contractor. The three factors that the IRS looks at to determine if you are an employee or an independent contractor should be your main emphasis.
The Employer’s Supplemental Tax Guide (Publication 15A), which is updated annually by the IRS, primarily depends on the level of control in three categories:
- Behavioral Control: Is it appropriate for the company to dictate and oversee how you carry out tasks?
- Financial Control: Is the company entitled to manage the commercial facets of your job?
- Relationship Type: What kind of partnership do the participants have? It should be permissible for independent contractors to work for anyone and anywhere. Workers are subject to company management.
Accurate estimates of the effective and marginal income tax rates are necessary for independent contractors.
To determine your effective income tax rate—that is, the average rate at which your income would be taxed—as an independent contractor, you must keep precise records of your earnings.
- It is possible to project how much tax you will owe by knowing your effective income tax rate.
- If you make enough money to move up to the next tax band, knowing your marginal income tax rate will help you figure out when your tax rate might go up.
- Your overall tax rate on income from outsourcing tasks is calculated by adding your effective income tax rate to your self-employment tax rate.
If you have many kinds of income and do not rely on gig work as your primary source of income, managing your earnings might be particularly challenging since you will need to keep track of numerous tax paperwork. You can pay the IRS your anticipated taxes quarterly once you’ve determined how much you owe.
