More and more Americans are doing "gig work" by driving a car for booked rides or deliveries, renting out property, selling goods online, and providing creative or professional services. As the IRS has noted, "you must pay tax on income you earn from gig work." The IRS adds that those who do gig work as an independent contractor may have to pay estimated taxes.
Tax preparers have explained that many gig workers can be confused about what they owe, what they can deduct, and when they're supposed to file their taxes.
Many gig workers and self-employed individuals don't actually know that they have to pay self-employment taxes and take care of other obligations.
"You may be surprised when you file a return and find out that, on top of your income taxes, you’ll owe another 15.3% tax. This is called self-employment tax and it covers Social Security and Medicare taxes. It can result in a large tax bill if you didn't know about it," tax preparer H&R Block warned. "If you were an employee, you'd pay half of this amount, and your employer would pay the other half. As a self-employed person, both are your responsibility."
However, there is also a special tax deduction for independent contractors and other self-employed individuals that lets you deduct half of your self-employment tax to offset your income.
Many gig workers also don't know that they need to pay taxes throughout the year to avoid owing a large sum or facing penalties.
"An employer typically withholds income taxes from their employees' pay to help cover income taxes their employees owe," the IRS states on its website.
The IRS also notes that gig economy workers, who are not considered employees, have two ways to cover their income taxes. If gig workers have another job as an employee, they can submit a new W-4 form to their employer to have more income taxes withheld from their paycheck. Workers can also make quarterly estimated tax payments to help pay their income taxes throughout the year, including self-employment tax.
"Self-employed individuals who expect to owe at least $1,000 need to pay estimated tax throughout the year," the TurboTax website explains. "Individuals use estimated tax worksheet from Form 1040-ES to estimate their quarterly taxes."
It is also important to note that even if you are due a refund when you file your income tax return, you may still be charged a penalty if you didn't pay enough in quarterly taxes throughout the year. Make sure you're completing those quarterly payments.
Peter Suciu is a Michigan-based writer who has contributed to more than four dozen magazines, newspapers and websites. He regularly writes about military small arms, and is the author of several books on military headgear including A Gallery of Military Headdress, which is available on Amazon.com.