Tax 101 for Gig Economy Entrepreneurs
Remote and “gig” work are on the rise, and that means there are new tax considerations for this new sector of the workforce
Many workers across the nation are taking advantage of the rising gig economy—whether taking on side jobs to earn extra income, like driving for Uber on the weekends, or freelancing full-time. Some estimates show that around a third of the workforce is taking part in the gig economy, and that number may continue to increase, as workers want better work/life balance, flexible work arrangements, and the potential for higher overall income.
With this surge in self-employment, taxes have become confusing for workers, especially after the Tax Cuts and Jobs Act (TCJA) made some significant changes.
Here are important tax considerations and recent changes for gig economy workers to keep in mind.
First, 1099 forms are likely the most common tax document that a self-employed worker will see. Usually, a company will send a 1099-MISC to freelancers with all income reported above $600. Or, a 1099-K may be sent from third-party providers if a worker had more than 200 transactions and earned at least $20,000. The 1099-K form is meant to report payments that a business receives from credit or debit cards or processors such as PayPal.
However, these forms can create confusion for freelancers, as some clients may not provide them. Gig economy workers should be aware that they need to report all income, even if they made below these thresholds and/or didn’t receive the forms.
Another important tax item to be aware of is the self-employment tax. This is a 15.3 percent tax in addition to income tax. The reason this extra tax exists is so that self-employed workers can pay Social Security and Medicare taxes that would normally be taken out by a traditional employer.
Even though this may seem like a pretty high tax, freelancers can deduct half of it to offset income.
Qualified business income pass-through deduction
The TCJA added a qualified business income deduction of 20 percent, which means that certain businesses could owe less tax. This deduction applies to the following entities, with certain qualifying factors:
- Sole proprietorships
- Some estates and trusts
This is a pass-through deduction that intends to provide help to smaller businesses, as the income limit is $157,500 per year or $315,000 for joint filers. Gig economy workers who are incorporated in certain ways may be able to take advantage of this deduction, in addition to their other qualifying business expenses. Consult with a qualified tax advisor to determine if and how you may be eligible.
Another important part of paying taxes as a freelancer or gig economy worker is the fact that quarterly taxes are often now due. These are estimated tax payments due four times per year, and if freelancers fail to pay them, they’ll could have to pay tax penalties at the end of the year.
This requirement is due to the fact that taxes aren’t automatically withheld from freelance income, as with a traditional employer. Note, however, that gig economy workers who have a main salary that does have taxes withheld may not need to make quarterly estimated tax payments—though it’s advisable to avoid a potentially surprising, large tax bill on the freelance income when April rolls around.
Business equipment deduction
The TCJA increased the deduction amount for business equipment. Now, up to $1 million can be deducted in equipment purchases, including computers, furniture, software, and more. However, actual business income will determine how much can be deducted and freelancers must carefully adhere to qualifying categories of equipment.
Other deductions for gig economy workers
The TCJA cut some deductions, including those for meals and entertainment. This means that some client expenses, such as a dinner meeting, won’t be able to be fully deducted. However, 50 percent of meals still may be eligible, so long as they were directly related to the business.
Other deductions that gig economy workers are eligible for include the home office deduction and the health insurance deduction (if they pay for their own insurance). Many other expenses related to running a business, such as a vehicle, a professional subscription, exchange rate fees, and more, may be deductible, so workers should keep track of all these expenses.
It’s important for those already in the gig economy and those considering entering it to understand these tax issues. Taxes need to be handled carefully so that all income is reported correctly and expenses are accurate.
Gig economy workers need to remember that:
- Income must be reported regardless of whether a client sends a 1099 form
- Self-employment tax is in addition to income tax
- Freelancers may be eligible for the qualified business income deduction of 20 percent
- Quarterly estimated taxes should be paid to avoid penalties or a surprising yearly payment
- The TCJA increased the business equipment deduction
- Meals and entertainment are no longer fully deductible
To discuss tax guidelines with a professional, contact Provident CPA & Business Advisors. We provide tax planning and business consulting services to help you navigate requirements while growing your business.