Workers in the gig economy enjoy certain benefits: Freedom. Flexibility. Independence.
But as the April 15 tax deadline looms, the advantages of gig work give way to one of its drawbacks: the headaches caused by Internal Revenue Service income reporting obligations.
Even though gig workers are technically freelancers, there’s a difference that makes them distinct: While traditional freelancers run their own businesses, gig workers often operate on specialized apps or platforms run by companies. A freelancer might negotiate a price or rate, but an Uber driver (for instance) doesn’t have that freedom.
Another difference between gig workers and freelancers is that gig workers are more a to receive income without any corresponding form W2s or 1099s. But the IRS, which launched a “Gig Economy Tax Center” in January 2020, makes clear that gig workers must report income in any form, “including cash, property, goods, or virtual currency.” (The IRS explains how to handle the reporting of virtual currency income here.)
The primary income reporting form for all independent workers is the 1099-MISC, which payers must submit to contractors and the IRS alike when the annual amount paid is $600 or more. But there’s another form called the 1099-K, which is more applicable to gig workers because it covers payment cards and third-party network transactions like PayPal.
In other words, it’s important for gig workers to keep track of all their income year-round, no matter how small or unconventional.
How to Cut Your Tax Bill
Meanwhile, here are a few tips for gig workers who want to save on their tax bill:
- If you use your car for business at least 50% of the time, you may be able to claim a business equipment tax deduction of up to $25,000.
- In addition to regular tax-deductible business expenses like travel and business supplies, you may be able to claim a 20% qualified business income (QBI) deduction.
- If you work out of your home, you can deduct expenses for the business use of your home. It’s important to pay attention to the IRS rules on square footage that applies.
- Save for your retirement. If you can shelter some of your income in a qualified retirement plan or IRA, you will enjoy an immediate tax break along with saving for retirement income.
Whether you’re working full-time in the gig economy or doing a side hustle, it’s important to know the rules at tax time. You want to be above board, after all — and you might want to save on your tax bill.