Gig Working and Taxes

Keith L. Rucinski, CPA, JD
Chapter 13 Trustee
Akron, OH

man on cell phone 

Today’s job market is often referred to as the “gig economy” as many companies outsource some of their work to independent contractors (sometimes called freelancers). For individuals looking to start a new career or make extra money, this outsourcing can lead to a lucrative side hustle and may often lead to opportunities to work remote or a flexible schedule.

However, independent work does require a person to keep track of the money they earn and what expenses are incurred during their work.

If you are an employee for a company, you are paid on a regular basis and receive a pay statement. Taxes are deducted from your pay, and you may receive health insurance through your employer. You may even participate in a retirement program. At the end of the year, you will receive a W-2 wage statement.

The W-2 statement will show the amount of your total wages, total taxes paid (including taxes for federal, state, and local taxes), the amount you paid for any benefits including health insurance and retirement contributions. The W-2 makes tax filing relatively quick and easy.

Being an independent contractor is not quick and easy at tax time.

Independent contractors do not get a W-2 which summarizes their pay. They receive a 1099 tax statement from the companies that paid for their services which only show the total funds paid to the contractor. If they worked for more than one company, then they will need to add all the 1099s together to get total payments received.

In addition, contractors do not have any money withheld for taxes. The contractor must pay all taxes directly by the due dates established by the taxing authorities – Federal, State and local governments.

Generally, contractors have to file a self-employed schedule with their tax return (1040 Schedule C). On this schedule, the total amount of money received for services are disclosed. Next the form 1040 Schedule C allows them to deduct expenses they incurred to perform their work. The expenses must relate to the work performed.

For example, suppose you pick up a side hustle delivering orders for a retail chain. You are using your own car. The use of the car may be deductible, but you must keep accurate records of the dates and mileage driven each time you do deliveries.

Independent contractors are also subject to self-employment tax to cover social security and Medicare taxes. Currently this is 15.30% of total net earnings (subject to caps established annually by the taxing authorities). The self-employed tax is in addition to income tax.

Note: An employee only must pay half this rate as the employer pays the other half, but a contractor must pay the full amount.

If you make a substantial income from your side hustle, then the tax authorities will require you to pay estimated quarterly taxes. If you do not pay the quarterly tax and owe tax at the end of the year based on the independent work, you may be subject to penalties and interest for late payment.

It is important to remember that independent contractors not only are subject to large self-employment taxes to cover social security and Medicare, but that contractors do not receive health insurance benefits or participate in a retirement plan. This means if you are quoting the value of your work you need to consider adding about 30% to your hourly rate to cover those taxes and be able to fund your own health insurance and retirement plan.

Many people love the freedom and flexibility of being an independent contractor and do very well at their chosen profession provided they understand the importance of keeping accurate records and making estimated tax payments so as not to incur adverse tax consequences.

A public education project of the National Association of Chapter Thirteen Trustees

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