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Know Your Tax Breaks If You Work In Gig Economy

Know Your Tax Breaks If You Work In Gig Economy

The gig economy applies to people ranging from freelance consultants to Uber drivers or full-time employees who do a side hustle. The tax returns are different whether you're paid by check, Paypal, Venmo, or bitcoin. In addition, the gig economy has different tax burdens, tax rules, and benefits, such as donations and retirement accounts. This makes it important to understand the tax implications, so you don’t get an unwanted visit from Uncle Sam.

Do you need to pay tax on earnings? 

The IRS expects you to file returns if you have gross earnings of $400 or more minus legal deduction. Whether the money is paid in cash, goods, property, or cryptocurrency, the taxpayer must file total income even without getting a Form 1099. 

Many people in the gig economy learn this rule the hard way. Most get notice or penalty from the IRS for negligence after not complying with the rule. However, the law issued in 2022 forces every payment method, such as Venmo, PayPal, etc., to report any earnings above $600 in net income made through their channel to the IRS. In the previous laws, these payment methods were only required to report to the IRS when transactions exceeded 200 and accumulated more than $20,000 in gross payments. 

What deductions can a gig worker claim on their taxes?

A gig worker can enjoy deductions on business expenses such as cell phone or car expenses used for work purposes. They are also allowed to deduct office expenses but are required to have a dedicated space as an office.

  • Business vehicle costs,

  • Phone and internet expenses,

  • Home office expenses (such as mortgage interest, insurance, utilities, repairs, and depreciation), and

  • Certain travel and meal expenses.

A taxpayer paying in cash can deduct eligible expenses every tax year. Generally, most of the expenses incurred by a gig worker, including phone costs, car, gas, and internet, are used for business and personal expenses. In such cases, calculate the total costs and deduct the amount used for business purposes. The rules are complicated and follow close monitoring of expenses.

What should gig workers do to prepare for tax season? 

The best way to stay on the safe side as a gig worker is to track all income and expenses for the whole year to prepare for the tax season. They are also expected to pay their taxes and Social Security taxes each month regardless of earnings. So you'll be better prepared for the upcoming tax season when you track earnings for the year.

A gig worker has to know how their income is taxed. You can learn by understanding the basic procedure of gig taxes. However, a tax professional will be happy to help in times of difficulty. 

Avoiding Penalties

The IRS has strict rules, and penalties for not filing taxes are heavier than penalties for owing taxes. You can only avoid underpayment penalties if you owe less than $1,000. You may also avoid penalties if 90% of your taxes are paid by the year-end or 100% from the previous year, whichever is intangible. But if your gross earnings in the previous year exceed $150,000 or $75,000 for married filing separate returns, the least threshold increases to 110%. Most people allow the fear of owning to stop them from filing taxes.