0
0
The Internal Revenue Service said it expects to soon release new guidance regarding how it will treat income earned in the gig economy, a step to clarify its position on how freelance and contract workers should report earnings. With more and more people working in the gig economy, knowing the details of your tax obligation has become even more crucial. In this article, we will detail the IRS’s involvement in this sector, discuss the important changes, and offer advice to economy workers to comply with tax laws.
What is the Gig Economy?
Gig economy is a labor model wherein most workers are bound to short-term job contracts or freelance work, in contrast to having a permanent, organizational job. There are online platforms through which this work economy is catered. Common examples include:
- Drivers for rideshare companies (Uber, Lyft)
- Freelancers (for writing, graphic design, web development, etc.)
- Delivery workers (DoorDash, Postmates)
- Task-based platforms (TaskRabbit, Upwork)
As this sector continues to grow, the complexity of managing taxes for those participating in the sector also grows.
Also: New IRS Approach to Gig Economy Income
The IRS has worked during the economy’s explosive growth push on guidance regarding work in this new structure, although historically the IRS worked in traditional employment models. Most gig workers are treated as independent contractors, so they must report their income, withhold their taxes and make estimated tax payments.
What to Expect From the New IRS Guidance
Clarification on Reporting Requirements
The IRS intends to make more clear what gig workers are required to report. This can involve payments received from a platform like Uber or Etsy, and knowing how to apply those to income for tax purposes.
Self-Employment Tax Information
Gig workers frequently need to pay self-employment tax on top of applicable income tax. The new IRS guidance will provide better guidance on how to calculate and file these taxes.
Deductions and Expenses
A lot of gig workers can write off certain business expenses, such as driving costs for rideshare drivers or supplies for freelancers. The IRS intends to offer further details on which deductions are allowable.
Digital Platforms and 1099s
Many gig economy platforms must issue Form 1099-NEC to workers who earn more than $600 in a given year. The IRS is likely to clarify the rules about reporting for these platforms and the workers getting these forms.
Why This Guidance Matters to Workers in the Gig Economy
The IRS’s new guidance applies to gig economy workers, who tend to have complicated tax situations. Here’s why:
Potential Penalties
Failure to report the income accurately or filing taxes could lead to penalties or audits. Giving clear guidance will help workers steer clear of expensive errors.
Maximizing Deductions
Knowing what deductions are available can help gig economy workers avoid missing out on tax-saving opportunities like home office deductions or vehicle-related expenses.
Financial Planning
More definitive guidance from the IRS will allow gig workers to better prepare for taxes by keeping aside the correct amount to cover their liabilities.
How Should Gig Economy Workers Prepare
Workers in the gig economy will need to take the initiative to stay in the know on tax requirements and best practices to stay in compliance:
- Record all income: Document everything made through these apps, making sure to keep any 1099s.
- Keep a Record of Business Expenses: Ensure that all paperwork relating to business expenses has been maintained because it could help in lowering taxable income.
- Estimated Taxes Payments: Gig workers are independent contractors, not requiring their services to file best-of-three-year combinations for estimated tax payments to avoid underpayment penalties.
- Seek Professional Tax Advice: A tax expert can guide you on income reporting and maximize deductions.
News and IRS Guidance Updates
The IRS has been rolling out guidance to help gig economy workers approach their tax responsibilities over the past few years. In recent months, the agency has started focusing more on accurate income reporting by self-employed people. The IRS is also looking to better digital tools to help gig workers comply more easily with the tax laws.
The IRS has also been increasing scrutiny on digital and other platforms about the accuracy of earnings reporting, a vital part of the new gig-economy landscape. The revised rules are probably going to specify what constitutes and amounts to reporting and tax calculation thresholds, putting gig workers in a better position to fulfill their responsibilities.
Frequently Asked Questions
How is the income from the gig economy reflected on my taxes?
Gig economy earnings are reported via a Schedule C (Profit or loss from Business), as attached to your tax filings. If and when you do receive Form 1099-NEC, confirm that the income reported on the form comports with what you reported.
Will I need to pay self-employment tax?
Yes, gig economy workers are subject to self-employment taxes once their net income exceeds $400. That includes not just income taxes, but also Social Security and Medicare taxes.
What expenses can I write off from my gig work?
Indeed, you can deduct business expenses such as vehicle mileage, office supplies and software subscriptions, as long as the expenses are directly related to your side hustle.
How do I pay my estimated tax payments?
Gig workers must pay estimated taxes quarterly to account for both income tax and self-employment tax. Use Form 1040-ES to figure and pay these payments.
Conclusion
As the gig economy expands, the IRS has to provide guidance on income from a gig economy platform that is taxable. Gig workers need to know what’s required of them, including reporting income, filing self-employment taxes, and taking deductions. As more granular guidance is released, workers can more effectively navigate the nuances of their tax obligations, avoid penalties and make better financial decisions.
