The gig economy has transformed the contours of the modern workforce, bringing forth a unique combination of flexibility, autonomy, and diversified income streams. Whether you’re driving for a ride-sharing platform, developing eye-catching graphics as a freelance designer, or mastering home repairs as a handyman, you’re participating in an ever-evolving, vibrant economy. But with the freedom of gig work comes an often overlooked aspect: understanding and managing your tax obligations. In this blog, I’ll cover some of the essential tax issues and IRS forms with which every gig worker should be familiar.
As a participant in the gig economy, you’re an independent contractor in the eyes of the IRS. Essentially, you’re a solo entrepreneur, which ushers in a unique set of tax rules and obligations. Central to these obligations is the Form 1099 series (Form 1099-NEC, Form 1099-K, Form 1099-MISC). We’ll look at each of these to get a better understanding of your gig worker responsibilities, but the key is that you must report your income to the IRS and to state and local tax agencies. As a gig economy worker, you should be familiar with what constitutes “income” and what you need to include on your annual tax return regardless of whether you receive one of the forms.
Income
Income is the starting point for determining taxes due. In general, income is all the money and other things of value that you receive, but the technical definition is broad. For practical purposes, income can include payments you receive from wages and employee benefits, self-employment or side jobs (freelance or independent contractor work), goods or services you sell online, renting personal property, partnerships or other business entities, investments, or other benefits paid to you. Income isn’t just money – it can also be the value of goods or services you receive. (Think of a bartering transaction where someone pays you in an exchange by giving you an item or providing valuable work for you.) You can even have income for tax purposes for payments made to someone else on your behalf. Income is generally taxable when the payment is available to you, even if you don’t immediately take possession of it; for example, you usually can’t delay income simply by waiting to pick up a check or deposit it into your account.
When you perform gig work, you should carefully store and organize your receipts and other records of your costs. Tax law allows you to deduct certain business expenses, which can reduce the amount of tax you will ultimately need to pay on your income. While tax law requires third parties in certain situations to report payments to taxpayers, such as through the Form 1099 series, those forms generally only show your income, not your expenses. It’s your responsibility to keep track of your deductible costs so that you can correctly calculate the tax you owe. Even if you don’t receive a form reporting income paid to you during the tax year, you should report the income on your tax return.
Form 1099-NEC
Form 1099-NEC, Nonemployee Compensation, is a tax document you may receive from clients who have paid you $600 or more during the tax year. Unlike traditional employees who receive Form W-2, Wage and Tax Statement, you’ll receive a Form 1099-NEC as a gig economy worker. The form provides the IRS information on the income you received as an independent contractor. If you also paid another independent contractor $600 or more during the year, you are required to file Form 1099-NEC with the IRS and provide a copy to the independent contractor no later than January 31. This is much earlier than the normal April 15 deadline for an individual income tax return so you should start working on submitting any Forms 1099-NEC as soon as the new calendar year begins.
Form 1099-K
Businesses that received more than $20,000 and had more than 200 transactions during the year should be familiar with Form 1099-K, Payment Card and Third-Party Network Transaction. However, in 2021, Congress passed legislation that dropped the reporting threshold down significantly for gig economy workers who receive money through payment cards or third-party network transactions. As enacted, the legislation requires the platform, known as a third-party settlement organization (TPSO), to send a Form 1099-K if the total amount of such payments exceeds $600 for the sale of goods or services, regardless of the total transaction count in a calendar year. TPSOs could include auction sites; car sharing or ride-hailing platforms; craft or maker marketplaces; crowdfunding platforms; freelance marketplaces; online marketplaces (sale or resale of clothing, furniture, and other items); peer-to-peer payment platforms or digital wallets; real estate marketplaces; or ticket exchange or resale sites.
The IRS delayed the implementation of the $600 threshold to tax year (TY) 2024. For returns for calendar year 2023, there is no change. The $20,000 and 200 transaction thresholds still apply. But in a phased approach, the IRS plans to introduce an interim threshold of $5,000 for TY 2024. For TY 2025, the IRS expects to fully implement the $600 threshold. Remember that you’re responsible for reporting all your income no matter the threshold amount required for issuance of the form. So even if you don’t receive a Form 1099-K or if the thresholds change, you should keep diligent records and report all of your income to the IRS.
Form 1099-MISC
While Form 1099-NEC reports nonemployee compensation, Form 1099-MISC, Miscellaneous Income, captures income that doesn’t fit in neat categories. For gig workers, this includes rent from real estate, royalties, or other types of income.
Form 1099-MISC usually isn’t the standard form for most gig workers, but those who diversify their income streams may encounter it. As always, you should carefully track these types of income and expenses regardless of whether you receive a Form 1099 reporting the income. And as with Form 1099-NEC, if you must send a Form 1099-MISC for payments you made to someone else, you must send the form to both the IRS and the payee by January 31.
Self-Managed Tax Withholding
Your gig income is also subject to self-employment tax, which includes Social Security and Medicare taxes. While traditional Form W-2 employees have these taxes automatically withheld from their paychecks, in the gig economy, the onus of tax withholding falls squarely on your shoulders. Think of yourself as both the employee and the employer. For instance, after wrapping up a rewarding project, your earnings tempt you to indulge in a shopping spree. But, as an independent contractor, you may need to resist this urge and set aside a portion of your earnings for income and self-employment taxes.
Most gig economy workers cannot wait until tax filing season to think about how much tax they owe because the IRS requires most to make quarterly estimated tax payments. Note that these “quarterly” due dates are not evenly spread throughout the year: for TY 2024, the four due dates are April 15 (except taxpayers living in Maine and Massachusetts have until April 17), June 17, September 16, and January 15, 2025. If you also work another job as an employee, one option to satisfy your estimated tax obligation is by asking your employer to withhold additional tax from your paycheck. To do this, file a new Form W-4 with your employer and enter the additional amount you want your employer to withhold. The IRS Tax Withholding Estimator tool can help you determine how much you would need to add to your withholding. Alternatively, you can make estimated payments yourself through your IRS online account or by using one of the other payment methods listed on IRS.gov/payments.
Estimated Tax Penalties
If you are required to make quarterly estimated tax payments but don’t, you could find yourself unexpectedly subject to costly additional penalties. The IRS bases these penalties on either paying too little in estimated tax or not paying each installment on time. Thus, you can’t necessarily escape penalties for a missed installment simply by paying more in a later installment. Try to spread your payments out evenly over the course of the year. The IRS provides a worksheet in Form 1040-ES, Estimated Tax, to help you determine how much estimated tax you owe.
Name, Image, And Likeness
In recent years, there’s been a groundbreaking change in the world of college sports introducing a new dimension to the gig economy: the monetization of an athlete’s name, image, and likeness (NIL). This offers student-athletes opportunities to profit from their personal brand, opening doors to endorsements, sponsorships, and other income-generating opportunities. But just like any other income stream in the gig economy, these opportunities also come with new tax obligations.
NIL income is taxable. Therefore, like any other gig worker, athletes must keep meticulous records of earnings and associated expenses. It might not feel like it, but an athlete earning NIL income is now self-employed, just like a food delivery driver or online freelance graphic artist. Read my past blog on the tax implications of NIL earnings.
Other Essential IRS Forms And Publications For Gig Economy Workers
The sea of taxation is teeming with countless forms and publications that can leave even the most financially savvy individuals scratching their heads. As a gig worker, a few key documents can help you:
- Form 1040-ES, Estimated Tax for Individuals: This form helps you calculate and distribute your estimated tax payments quarterly, effectively spreading out your tax liabilities throughout the year.
- Schedule C, Profit or Loss From Business (Form 1040 or 1040-SR): This form is your platform to report gig income or loss and claim business expenses. Appropriately managing these business expenses can reduce your taxable income and decrease your overall tax liability.
- Schedule SE, Self-Employment Tax (Form 1040 or 1040-SR): This form helps you compute self-employment tax, a unique component of gig worker taxation with which you might not be familiar.
- Publication 505, Tax Withholding and Estimated Tax: This publication contains the rules, calculation methods, and information on penalties for underpayment of estimated taxes.
Conclusion
Of course, there are many other forms, publications, regulations, and statutes that might be applicable to your federal tax situation. This blog post is merely a broad introduction. For more information, visit the IRS’s guide to managing taxes for your gig work and guide to business expense resources. The gig economy can sometimes seem like a puzzle, but with a thorough understanding of the forms and rules relevant to your gig work and a disciplined approach to tracking your income and expenses, you can confidently piece together your tax responsibilities.
Read more about Form 1099-K: If You Resold the Hottest Ticket of Summer 2023, You Likely Didn’t Receive a Form 1099-K – But This Won’t Last Forever & Always
