Posted by James Financial Services Inc

What Are GIG Economy Taxes?

What Are GIG Economy Taxes?

If you're wondering if your gig income is taxable, the IRS sent out a little reminder recently to that effect.

In a June 27 memo on its website, the Internal Revenue Service said, "earnings from gig economy work are taxable, irrespective of whether an individual receives information returns." If the gig is working as an employee in a business, your employer usually withholds income tax from your pay, including FICA taxes, to cover Social Security and Medicare. If so, you will receive a W-2 Form.

If you are a freelancer, without payroll tax, companies that pay for your gig labor must submit a Form 1099-K. However, this only applies if the total revenue you received from a particular company was greater than $600 in 2022, regardless of the total number of transactions.

Due to the rules, you cannot receive a Form 1099-K or any other information return for 2022. This means it is up to you to track any additional income you earn during the fiscal year to file an accurate return during the next tax season. The best strategy is to keep a ledger or spreadsheet and record all payments for side gigs received during the fiscal year.

To help you meet your tax and tax obligations, the IRS provides the following guidance:

  • Gig economy workers who are not considered employees have two ways of covering their income taxes: Submit a new W-4 form to your employer to get more income tax withheld from your wages if you have another job as an employee. Make estimated quarterly tax payments.

  • Gig workers may be required to make estimated tax payments on a quarterly basis to help pay income taxes throughout the year, including self-employment tax. This applies not only to federal income tax but also to state income tax in most states. Consult a tax professional to help you estimate how much you are expected to withhold. Don't have the resources to consult one? The IRS has a withholding estimate tool on its website to help you determine how much to withhold.

  • Self-employed gig workers must pay all Social Security and Medicare taxes for entertainment income.

It is important to ensure that you are correctly classified as a taxpayer, such as an independent contractor or employee.

If you are an independent contractor or a freelancer, you may be able to deduct business expenses depending on tax regulations and limits. Therefore, keeping track of your business expenses and income is also important.

If you're in the gig economy, here's what you need to know about Form 1099-K

It is hard to keep track of all the 1099 series of forms.

Form 1099-MISC reports "miscellaneous" payments (as you might guess from the name); to 1099-NEC, which reports non-employee compensation; to 1099-K, which reports payment card transactions and third-party networks transactions.

Until now, however, you may have overlooked Form 1099-K because the benchmark threshold was $20,000 in reportable payments. Starting in 2022, however, that minimum threshold is lowered to $600, the same level that applies to other 1099 payments, so many more people will be affected, especially in the gig economy.

Let's start with the basic rule: whenever income is received, it must be reported to the Internal Revenue Service and is potentially taxable. When you work for an employer as an employee, you receive a W-2 form at the end of the year. If you are self-employed, you will likely receive Form 1099-NEC or -MISC to report payments for your services rendered. And if you're part of the Gig economy, you can get paid from various sources, including TaskRabbit, Venmo, Uber, and even credit cards if you're willing to accept them. Form 1099-K is intended to report these types of payments.

Banks and online payment networks, known as Payment Settlement Entities (PSEs) or Third Party Settlement Organizations (TPSO), must submit Form 1099-K by January 31 of the year following the year during which the payments were made. For many people, the first time they receive this form will be January 31, 2023, due to the lower deposit limit for 2022 payments.

So what should you do now? As stated above, you should always try to keep separate records of your personal and business income and expenses. This involves keeping receipts and supporting documents. Good record keeping can save you money on taxes because PSEs cannot distinguish between personal and business payments. So if you split the bill at a restaurant for a personal lunch, but your friend reimburses it via Venmo, it may inadvertently show up in your 1099-K report at the end of the year.

You will also need to document your business expenses to take advantage of any tax deductions.

At the end of the year, you'll want to compare your records to confirm that the amount on your Form 1099-K is correct, so again, keep good records! 



James Financial Services Inc
Contact Member