The gig economy refers to the jobs and workers that fall outside of the traditional long-term employment structure. Freelance professionals, contractors, and part-time workers for mobile service providers like Lyft, UberEats and Wag! are all a part of the gig economy. This form of work has become popular in recent years, driven by workers’ desires to be their own bosses, gain professional flexibility, and uncover creative streams of income. But even if you enjoy the flexibility and the benefits of working for yourself, you must pay taxes.
As a gig economy worker, you may be wondering how your tax obligations differ from those of traditional employers. It is important to understand how tax laws apply to you, as tax errors and omissions could leave you facing penalties from the IRS. Read on to learn more about how to avoid common tax problems while working in the gig economy.
Common Gig Economy Tax Mistakes How to Avoid Them
Whether you are a full-time freelancer writer, a rideshare service driver, or an occasional contract worker, you must pay taxes. The IRS classifies you as a small business owner with additional rules, audits, and notices. So, when filing your tax returns, you must report the gig work income you earned during the year. Here are the common issues when filing your taxes as a gig economy worker:
1. Failure to Pay Self-Employment Taxes
If you’re a gig worker, the IRS categorizes you as a small business owner, and you have to pay a 15.3% tax in addition to your income taxes. You may not be aware of this significant additional tax bill known as the self-employment tax, which pays for Social Security and Medicare. Fortunately, you may be eligible for tax deductions for self-employed individuals, which can significantly reduce your tax burden.
2. Paying Your Taxes Late
As a gig worker, you may end up scrambling to figure out how much you owe before the tax filing deadline. But late payment of your taxes may increase what you owe by attracting hefty tax fines and penalties, including a 25% penalty when you fail to file for more than five months. If you run behind for more than 60 days, you accrue a minimum fine of at least 100% of the unpaid taxes or $435.
It’s advisable to file your returns on time even when you can’t pay immediately to avoid IRS enforcement notices and filing delinquent notices. So set aside some cash from your gigs to cover the taxes, and arrange a reminder to file on time. If you’re struggling to pay what you owe, it’s still important to report your income to the IRS. You may be able to agree to a payment plan with the IRS to avoid more penalties.
3. Not Reporting on Your Cash Income
While the majority of digital gig economy workers receive payment through mobile apps, many other gig workers operate in cash. This means that, depending on your specific type of gig work, you may not receive official IRS documents to validate your income. As a gig worker, you are on the honor system to validate your payment with the IRS. It is extremely important to record and disclose any income you receive, even if it’s only a single job or payment. The IRS requires you to record and report your cash income and pay the associated tax.
4. Including Personal Expenses as Tax-Deductible
As a general rule of thumb, entertainment, cars, phone, and travel expenses are not tax-deductible by default. These are personal expenses, and you must prove to the IRS that they are business-related to qualify for business expense deductions.
5. Not Paying Estimated Taxes Throughout the Year
If you are self-employed, you do not have your taxes automatically deducted from a regular paycheck. For this reason, you must pay your estimated taxes four times a year, and failing to pay on time can result in significant bills and penalties when you file your return. If you cannot pay, you may request an extension or payment agreement from the IRS.
Consider Professional Tax Help
If you are a gig economy worker, taxes can be confusing, but they don’t have to be a burden. Understanding your tax obligations and preparing to file is crucial to avoid tax surprises. If you have questions, don’t hesitate to contact a financial professional for help avoiding these common tax problems.