Gigs and taxes
If you became a gig worker last year, your taxes got more complicated.
Gig work — Uber driving, Instacart shopping, Amazon Flex delivery and so on — is on-demand, freelance work that’s typically taxed as self-employment. Instead of having an employer withhold money from your paycheck, you’re an independent contractor who is expected to pay taxes on your gig income as you earn it. You’ll also owe a larger share of your pay to Social Security and
Medicare taxes.
1 Tax basics The self-employed may get tax forms known as 1099s showing how much a company paid them. Even if you don’t get a 1099, though, you’re expected to file a tax return and report all your self-employment income if your net earnings are $400 or more. Net earnings is basically the income you earn from your self-employment minus allowed deductions.
You’re also going to owe self-employment tax. Employees typically pay 6.2% of their income in Social Security taxes and 1.45% in Medicare taxes, while their employers pay an equal amount. But if you’re your own employer, you typically pay both halves of those taxes: 12.4% to Social Security and 2.9% to Medicare, for a total of 15.3%. 2 What to deduct
Internet, phone service, transportation, health insurance, a home office — all these and more are potentially deductible, at least in part, if they are “ordinary and necessary” parts of running your business.
But you can go too far. You may need cell service for the app-based driving or delivery work you do, for example, but you can’t deduct 100% of the cost — only the portion that’s related to your gig work.
The 15.3% self-employment tax mentioned above is also deductible. You can deduct half of what you pay in self-employment tax when figuring your income taxes.
You also can deduct retirement plan contributions.
Avoid penalties Don’t let 3
the fear of owing money keep you from filing, however. The IRS has payment plans, and its penalties for failing to pay on time are far less than those for failing to file a return on time.
Tax software can guide you through the process, but consider hiring a tax professional to help you if this is the first time you’ve filed as self-employed. There are enough gray areas and complications to gig work taxation that having help from a pro can pay for itself.
This article was provided to The Associated Press by the personal finance website NerdWallet. Want to suggest a personal finance topic that Quick Fix can address? Email apmoney@ap.org.