The gig economy is booming right now, but if you've found yourself earning a living as a gig worker, you may be dreading tax time. If you're used to simply collecting a W-2 form and plugging the information into a 1040, dealing with multiple income streams and tax deductions can be daunting. Working gigs and side jobs is a very different lifestyle from, say, owning a store or a restaurant. But like a restaurant or store owner, you're considered self-employed and must approach your taxes accordingly. Take a look at some tips that can help.
Organizing Your Income
When you're an employee working an hourly or salaried job, your employer just gives you a W-2 form sometime during the month of January, and you use that to report your income. When you're a freelancer working gig jobs, you will usually receive a 1099 from each client or customer that's paid you during the year. For example, if you drive for Uber or Lyft, those companies will send you a 1099 with your earnings. However, it's not always that simple.
Some companies only send out a 1099 for gig workers who make more than a certain amount of money, so if your earnings fall under that threshold, you may not get one. If you do work for an individual rather than a company, that individual may not realize that they're supposed to send out a 1099. If you do work online for someone located overseas, they may not send a 1099. It's important to remember that even if you don't receive a 1099 for work that you did, you still have to report the income. It's best to keep detailed records of who paid you what and when during the year. Check your bank, PayPal, and other financial transactions to be sure that you're not missing anything.
Understanding Your Tax Rate
You may have heard people talk about the "self-employment tax". This is not an extra tax on self-employed people; usually what is referred to by that phrase is the Social Security and Medicare tax.
As an employee, you only pay half the Social Security tax and the Medicare tax. The employer pays the other half. The total rate is 12.4% of your income for Social Security and 2.9% of your income for Medicare. As a self-employed person, you pay the total rate, not the half that you paid as a regular employee – that's why it seems that your tax rate is higher when you're self-employed.
Knowing Your Deductions
It's common for self-employed workers, especially gig workers, to be unaware of deductions they can take to lower their tax burden. You don't want to miss these deductions, as they can make a big difference in what you owe or whether you get a refund.
For example, if you work from home, you may be able to claim a home office deduction. This doesn't just apply to people who do office-type work like writing or website design. If you make crafts or jewelry at home and sell them online, for example, your workspace might be considered a home office.
Audits or penalties can really disrupt your life and your finances, so you want to be sure that you get your tax return right. If you're unsure about your ability to handle a complex tax return, consult a tax professional in your area for expert help. Visit a site like http://www.cpa-winterhaven.com for more help.
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