Posted by Income Taxes and Bookkeeping LLC

2021 Tax Tips for Gig Workers

2021 Tax Tips for Gig Workers

This historic pandemic triggered a 25% rise in the freelancing market last year in which many people turned to work from home to supplement their income. 

For long-time gig workers or people just working as an independent contractor, earning up to $400 as a gig worker makes it essential for you to file taxes.

 

Comparing Contractors and Independent Contractors 

A gig worker is the same as an independent contractor or a self-employed individual. The approach to tax for an independent contractor is way different from that of employees. 

Taxes of employees will automatically be withdrawn from the paycheck, unlike independent contractors and self-employed. Such people need to estimate and pay their taxes on income they earn or risk penalty. 

It is essential for people with a tax liability of $1,000 for the 2020 tax year to pay the self-employment taxes quarterly to avoid penalties. The due dates are the 15th of April, June, September and January to avoid penalties.

 

You are Classified as a Small Business 

Uncle Sam classifies and treats freelancers like a small business whether they possess an EIN or not. While this comes with tax obligations, there are a couple of benefits. 

There is the possibility to deduct business expenses related to your practice as a self-employed worker or independent contractor. All business expenses are classified either as necessary or ordinary for the job success. Deducting your business expenses will help bring down the tax amount you owe.


Vehicle Expenses 

For people working in the gig economy, one of the most common deductions is vehicle expenses. If you use your vehicle for business purposes or work in the rideshare business, you might qualify for vehicle expense deductions for your freelance work. 

For you to qualify for such, the vehicle must be used majorly for business activities. Some vehicles, however, might not be eligible like dump trucks since they are used as business expenses. 

For you to deduct the vehicle expenses, you can take either of two methods:

  1. Deduct the actual Operating Expenses like Maintenance, Gas, Depreciation and Insurance

Also, do not forget that you cannot deduct the entire depreciation, maintenance, and insurance cost if you use the car for personal use. With this, if your vehicle was driven for personal reasons 75% of the time and for business purposes 25% of the time, only 25% of the cost of insurance and maintenance is allowed for a deduction on the returns. 

  1. Deduct a Standard rate for every business mile driven in the past year

 This is a suitable method for gig workers compared to the actual operating cost if there is a good mileage tracker. For every mile you drive for business and work activities, you will deduct a standard rate. This rate is 57.5 cents for every mile you drove in 2020. 


Keep All Receipts 

For you to have a tax deduction, Uncle Sam requires that you document all expenses. This involves an accurate record of all money you received from the gig duties and keep all receipts for your expenses.

Tracking the income you got and expenses incurred will make it easy to file taxes when it's time. Also, should there be an audit, your records will come in handy to verify your claims. 

Uncle Sam requires that you keep receipts for:

  • Mileage records

  • Charitable donations

  • Business trips or expenses related to entertainment 

Taxes are pretty complicated, making it essential to reach out to a tax professional like INCOME TAXES & BOOKKEEPING, LLC. if everything seems overwhelming. A professional will guide you in identifying deductions and make sure that you take advantage of every avenue when you file taxes. 


Filing Requirement and Paperwork

Workers or employees, not independent contractors, get a W2. For independent workers using a gig app, they might get a 1099-K. For some states, 1099-K will be sent as long as you have more than 200 transactions, alongside a $200,000 earned.

You might not qualify for a 1099-K, but you will have to report income if you made more than $400. Many app-based companies will make available an earning report for previous years to make filing easy for freelancers. 

Schedule C is pretty essential if you want to report loss or income. For people with expenses below $5,000, it might be possible to use Schedule C-EZ.


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