Are You Prepared for Tax Season in the Gig Economy?

How to Manage Taxes in the Gig Economy

The gig economy, characterized by on-demand work, services, and goods, is steadily growing. This increase in gig work, whether part-time or full-time, has significant implications for tax responsibilities. Income earned from gig work, such as driving for a ride-sharing company, selling goods online, or renting out a property, is taxable and must be reported on tax returns. However, many gig workers may not be aware of their tax obligations and could find themselves facing unexpected tax bills or penalties.

Gig economy income is taxable, even if the worker doesn't receive a Form 1099-MISC, Form 1099-K, or W-2 income statement. Furthermore, the IRS requires gig workers to keep adequate proof of their income and expenses. Some gig platforms may track this information and send workers a W-2, 1099-MISC, or 1099-K at the end of the year. However, it is essential for gig workers to keep track of their income and expenses independently, which can be reported on their tax returns.

According to IRS Notice 2023-10, the implementation of a lower reporting threshold for third-party settlement organizations has been delayed until after the 2022 calendar year. Consequently, the existing 1099-K reporting threshold of $20,000 in payments or more than 200 transactions will remain in effect for the tax year 2022. This delay could lead to more reliance on tax professionals, especially for small businesses or side hustle income.

Tax professionals can play a crucial role in educating their clients about their tax responsibilities. They can explain the need to report and pay tax on self-employment income and help clients understand that taxes are a cost of doing business. In order to avoid surprises at tax time, tax professionals can advise gig workers on the percentage of income they should factor in for taxes throughout the year. 

Two key methods to cover tax payments for gig economy workers, who are not typically considered employees, include submitting a new Form W-4 for other jobs where they work as an employee and making quarterly estimated tax payments throughout the year, which also includes self-employment tax.

Proper worker classification is another significant aspect of gig work. Many gig economy workers are classified as independent contractors by digital platforms that match workers' services with customer needs. This classification has tax implications, as independent contractors must pay all Social Security and Medicare taxes on their income from gig activities. They may also be able to deduct business expenses, depending on tax limits and rules.

When the new law takes effect, the reporting requirement will reduce to $600 per year from $20,000 per year regardless of the number of transactions. The new reporting threshold is a concern as personal transactions through platforms like Venmo, Paypal, and Cash App will be reported to the IRS as part of the new, stringent reporting requirements. However, the delay in implementation offers an opportunity for tax professionals to educate their clients further about their reporting responsibilities.

In summary, gig economy workers need to stay on top of their tax responsibilities. They need to understand their classification, keep good records of their income and expenses, and make appropriate tax payments throughout the year. Meanwhile, tax professionals can provide invaluable support in helping gig workers navigate their tax obligations and minimize the risk of penalties or unexpected tax bills. The Gig Economy Tax Center on IRS.gov is a useful resource for gig economy taxpayers to understand their tax responsibilities better. If you have any questions about the gig economy Freese, Peralez, & Associates are here to help you, give us a call to schedule an appointment today!