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Gig workers have to pay taxes, too.
AP/Brennan Linsley
Gig workers are subject to federal taxes on their net income as well as a 15.3% self-employment tax on net earnings above $400.
This includes driving for Uber or Lyft, delivering food or groceries, or selling goods online.
Like any other self-employed person, gig workers can lower the income tax they owe by claiming relevant expenses.
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The gig economy is integral to millions of Americans’ livelihoods, and the IRS is itching to take its share.
The IRS says the gig economy includes any “activity where people earn income providing on-demand work, services or goods,” such as ride-sharing and delivery services, running errands, and selling products online. That means if you earned money from Uber, Lyft, Postmates, Instacart, Etsy, or a similar company, you may be on the hook for federal income taxes.
That’s because the IRS requires that anyone earning non-W-2 income from a job be classified as an independent contractor, even if they also hold a job as a W-2 employee. These contract workers are subject to the 15.3% self-employment tax and federal income tax on their additional income, which they can pay through estimated quarterly taxes or by increasing their withholding at any W-2 job.
How to pay taxes on gig economy income
As it relates to the 2023 tax season — when you file taxes for income earned in 2022 — businesses that paid you for on-demand work may send forms to the IRS to report those payments depending on how they classify and pay workers. Common forms include 1099-NEC (Nonemployee Compensation) and 1099-K (Payment Card and Third Party Network Transactions).
The IRS says businesses are required to file a 1099-NEC form for workers who they paid more than $600 throughout the year. You should receive copies of these forms by early February.
If you don’t receive these forms, you’ll need to rely on your own payment records to report all net income earned from temporary or part-time sources on your tax return. You’ll have to pay income taxes on your net earnings (your gross income minus any related expenses). Plus, if your net earnings are more than $400, you’ll also be responsible for self-employment tax on that amount.
If you plan to continue earning income from side jobs, make sure you you adjust your withholding though any W-2 job or know the due dates for paying quarterly taxes so you don’t have to pay penalties or face a large bill when you file your return.
How tax deductions work for gig workers
Don’t forget that gig workers are classified as independent contractors by the IRS, which means they’re entitled to tax benefits for the self-employed.
As a gig worker, you’ll need to report all your income to the IRS, but you can also reduce the amount of taxes you pay on that income by claiming relevant deductions. And if the expenses turn out to be more than the income — meaning your “business” had a loss — you can deduct that loss against your other income for two years before the IRS considers the activity a hobby and disallows the deduction of losses.
Generally, an independent contractor can deduct any expenses that are considered “ordinary and necessary” for their trade or business. This might include insurance, state and local taxes, interest, travel, and phone or office supplies associated with operating and maintaining your business. It can also include the cost (or partial cost) of a home office or car that is used for conducting business.
As a self-employed worker, you can also deduct the employer portion of the self-employment tax — 7.65% of your net earnings — from your gross income to arrive at your adjusted gross income (AGI). And you may be eligible to deduct 100% of the cost of your health insurance premium from your AGI if you’re not covered by another employer’s plan.
For more information on filing your taxes as an independent contractor, check out the Gig Economy Tax Center page on the IRS website.
Frequently asked questions
How do I file a tax extension?
A tax extension will give you an additional six months to file your return. While an extension gives you more time to file, it doesn’t extend the date to pay your tax liability if you owe money.
If you’re doing your taxes electronically, you don’t need to fill out any extra paperwork. The IRS automatically processes an extension when you pay all or part of your estimated income tax, either online or by phone. Otherwise, you can file an extension by completing Form 4868. You can use the IRS e-file or file out a paper form and mail it in.
Are medical expenses tax deductible?
You can deduct qualifying medical expenses that exceed 7.5% of your adjusted gross income. To claim medical expenses, you have to itemize your deductions instead of taking the standard deduction.
The IRS describes deductible medical expenses as “payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.” These can include everything from medication, doctors’ fees, eyeglasses, and the cost of transportation to and from medical appointments.
What’s the penalty for filing taxes late?
The deadline to pay any individual income tax you owe for the 2022 tax year is April 18, 2023. Not filing and paying on time will result in a 5% penalty per month on any unpaid tax. After 60 days, the penalty may increase. There will also be interest accruing on your balance equal to the federal short-term rate plus 3%, compounding daily.
If you miss the filing deadline and don’t owe any tax, your refund will be withheld for up to three years until you file.
How long should I keep my tax records?
A general rule of thumb is to keep your tax returns for at least three years from the date you filed them, the due date, or the date you paid the tax, whichever is later. In addition to your tax returns, you should keep any supporting documentation.
You may need to keep your tax records for longer in certain situations. Generally, a more complicated tax situation will lead to a longer required holding period. For instance, if you claim a capital loss from securities or bad debt on your return, keep the records for seven years. The extended record-holding period gives the IRS ample time to check into your claim to confirm that the appropriate amount of tax was paid.