Gig-economy workers face tax complications

The nasty secret of being a new entrepreneur is that your tax bill could be way higher than you’d imagine.

When you’re driving for Uber, delivering for Amazon, picking up freelance jobs or otherwise participating in the gig economy, you aren’t working for a boss who is required to withhold taxes from a regular paycheck. As a result, you’re subject to some fairly complex tax rules.

On-demand workers don’t have the luxury of only paying attention to income taxes in March or April, either.

If you don’t pay enough taxes throughout the year, you could be hit with steep penalties.

Some issues to consider:

Should I pay taxes as I work during the year?

You could be required to pay quarterly-estimated taxes on the money you’re making as an independent contractor. And you’re looking at paying self-employment taxes involving Social Security and Medicare.

“Many taxpayers — especially first-time independent contractors — don’t realize they owe both income and self-employment taxes,” said Caroline Bruckner, managing director at American University’s Kogod Tax Policy Center.

Quarterly estimated-tax payments are required when a taxpayer is expected to owe at least $1,000 in tax.

And it’s usually the taxes connected to Social Security and Medicare that trip up workers in the gig economy.

For example, someone who earns $7,500 per year driving for a ride-sharing company owes potentially $1,059.72 in just Social Security and Medicare taxes. And that alone would trigger quarterly-estimated filing requirements, Bruckner said.

Various websites, including TaxAct.com, have a self-employment tax calculator that can help you run some numbers to avoid trouble in the future.

What forms do I need?

Ride-sharing services such as Uber and Lyft treat their drivers as independent contractors, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting in Riverwoods, Ill.

Uber and Lyft note online that drivers receive 1099 forms, not W-2s.

“The income they earn is taxable whether they receive a 1099 or not. Sometimes they may receive a 1099-MISC, a 1099-K or nothing at all,” Luscombe said.

In general, business owners issue a Form 1099-MISC to those workers who were paid at least $600.

What kind of tax breaks can I get for my expenses if I am self-employed?

Nathan Rigney, senior tax research analyst at The Tax Institute at H&R Block, said too often people who are new as self-employed drivers or other jobs in the sharing economy do not maintain good records of income or expenses.

“Even something as simple as tracking business mileage, which can be a significant expense, is often ignored by new gig-economy participants who aren’t yet aware of the tax savings those records provide,” Rigney said.

Other expenses to track: Cellphone use for work, oil changes, supplies, health insurance premiums, fees paid to the app or website operator involved with the business.