Author: Laura

If you make money in self-employment online in the gig economy the money you make may be taxable. Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks such as Etsy and eBay, uber, and other online platforms, etc.

Beginning with the tax year 2023 if someone receives payment for goods and services through a third-party payment network, their income will be reported on Form 1099-K if $600 or more was processed. This is a big change from the current requirements before 2023 the Form 1099-K reported to the IRS 200 transactions and $20,000.

Generally, the rule is regardless of whether you make $600 online or offline your net earnings from self-employment of $400 or more regardless of how you earn it, are taxable, and you are required to file a tax return even if it’s a side job, part-time or temporary. Now with the new law, the IRS will be aware of online money makers who are earning $600.00 or more online, you are no longer on the honor system.

What is the Gig economy?

The gig economy is based on flexible, temporary, or freelance jobs, often involving connecting with clients or customers through an online platform. Gig work can be a great way to supplement income, try out a business idea, or become self-employed. Gig work is also referred to as a side hustle. The “gig economy” is a relatively new term for a traditional way of earning a living: being paid on a per-job basis for work performed directly for a customer.

Being hired to do a single short-term task, project, or job can be called a “gig.” This type of occasional work is part of what is now referred to as the “gig economy.” In a gig economy, large numbers of people work in part-time or temporary positions. Gig economy workers are generally classified as independent contractors, even in the corporate sector.

A Brief list of Examples of work in the  gig economy is:

Drive a car for booked rides or deliveries 

Rent out property or part of it

Run errands or complete tasks 

Sell goods online including in Online Marketplaces

Provide creative or professional services

Provide other temporary, on-demand work

Freelance work

People working in the gig economy use Digital business platforms that match workers’ services or goods with customers via apps or websites. This includes businesses that provide access to:

Ridesharing services

Delivery services

Crafts and handmade item marketplaces

On-demand labor and repair services

Property and space rentals

Other examples of Gig platforms connecting service providers with customers, or gig workers, are too numerous to list here.

About The IRS 1099K

Gig platforms may send forms to the IRS to report payments made to you. If they do, you should receive copies of the forms by January 31. These may include:

Form 1099-K, Payment Card, and Third-Party Network Transactions

Form 1099-MISC, Miscellaneous Incomes

You must report income earned from the gig economy on a tax return, even if the income is:

Not reported on an information return form—like a Form 1099-K, 1099-MISC,

Form 1099K general reports your gross income earned and does not take into account your deductions, that is where good bookkeeping records come in.

Your Responsibility:

You are responsible for good bookkeeping records that track your business income and expenses. Keeping track of your expenses lowers your tax obligation. It can also show the progress of your business and if it is profitable.

Taxes You Will Be Responsible For:

Federal Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

ESTIMATED TAXES

Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax.

If you do gig work as an employee, your employer should withhold tax from your paycheck. If you do gig work as an independent contractor, you may have to pay estimated taxes.  If you are unsure if you are an employee or an independent contractor ask. If you have a regular job you may be able to avoid making estimated tax payments on your gig income by requesting your employer withhold more tax from your employee paycheck.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

PAYING ESTIMATED TAXES

As a general rule in most cases, you must pay the estimated tax if both of the following apply.

You expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits.
You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your tax return, or
b. 100% of the tax shown on your tax return.
Your tax return must cover all 12 months.

Estimated tax payments are due four times a year:

April 15 for payment period January 1–March 31

June 15 for payment period April 1–May 31

September 15 for payment period June 1–August 31

January 15 for payment period September 1–December 31

State Business Taxes

You are also required to file annual state tax returns for your business with the State Revenue Office. Your state income tax obligations are determined by your business structure. For example, corporations are taxed separately from the owners, while sole proprietors report their personal and business income taxes using the same form.

If your business has employees, you’ll be responsible for paying state employment taxes. These vary by state but often include workers’ compensation insurance, unemployment insurance taxes, and temporary disability insurance. You might also be responsible for withholding employee income tax. Check with your state tax authority to find out how much you need to withhold and when you need to send it to the state.

Local Business Taxes

Depending on your business location and local city requirements, a local city tax return and a business privilege tax may apply. Check with your local city clerk’s office for full details on their tax requirements for small businesses doing business in the city where your business resides.

Proper record-keeping for small businesses makes the process easier and keeps you compliant with the law. It will also help you in the long run, to be prepared in case of an IRS audit. Most importantly, records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.

1. Open a business banking checking account

You should always use a separate business checking account for business to keep track of income and expenses only. Do not use a personal checking account for business, business and personal finances should be kept separate. Opening a business checking account keeps your records organized. Check with your banking institution to find out what documentation you need to provide to open a business bank account.

Typically you would need the following information:

Social Security number
Employer Identification Number (EIN) if it applies
Business name
Business License
Organizing documents (e.g., articles of organization) If it applies

2. Decide on the accounting method you will use

Every business taxpayer is required to have an accounting method to report income and expenses. The two most commonly used methods are cash and accrual. Once you choose your accounting method, you must follow it consistently. Generally, you may not change your method of accounting unless you obtain permission from the IRS.

CASH METHOD

Due to its simplicity, the cash method is a popular choice for small businesses. To determine gross income, add up the cash, checks, and fair market value of property and services you receive during the year.

If you receive a check on December 28, 2011, but decide not to cash or deposit it until after December 31, 2011, you must still count the check as income in the year you received it.

Business expenses are usually deducted in the year they are paid. For example, you order office supplies in October 2011 and they arrive in December 2011. You send a check to pay for them in January 2012. Under the cash method, you should claim that business expense deduction on your 2012 tax return because that is the year you paid for the supplies. Certain businesses cannot use the cash method. In addition, special rules apply to the accounting of inventory.

ACCRUAL METHOD

With the accrual method, income is reported in the year in which all events that fix the right to receive it have occurred, and the amount can be determined with reasonable accuracy, even if income was received in a different year. For example, the accrual method calls for income to be reported when a service is performed. It doesn’t matter that the customer doesn’t pay until the following year.

Similarly, you deduct business expenses in the year the liability arises, regardless of when they are actually paid. Using the office supply example, under the accrual method, you may deduct the business expenses for supplies on your 2011 tax return, the year you ordered the supplies and they were delivered, even though you sent a check to pay for them in January 2012. You may deduct the expenses in 2011 because that is when you became liable for the expense.

COMBINATION

Hybrid accounting is a mixture of accrual and cash-basis accounting. Like the cash-basis method, you record income when you receive it, and record an expense when you make payment. Hybrid accounting uses both cash and accrual methods.

3. Determine how your business will get paid

Determine what kinds of payments you will accept from your customers such as:

Cash
Check
Credit card
For instance, if you have a business online your might use Paypal or Etsy payments to receive money from customers.

4. Prepare Your Chart of Accounts

A chart of accounts (COA) consists of the following five account categories:

Assets
Liabilities
Equity
Revenues
Expenses

Start by making a list of everything the business owns, owe, the methods you will use to receive money earned, and the expenses you expect to incur in the course of your business.

5. Keep good records of your income and expenses

Tracking expenses is a crucial part of accounting and in the long run, it benefits you by reducing your tax obligation. When keeping a record of your income and expenses, be sure to hang onto the following:

Receipts
Bank and credit card statements
Invoices
Bills
Canceled checks
Proof of payments
Previous tax returns
Forms 1099 misc, 1099K, W-2
The more documentation you keep in your records, the better off your business and books will be. Organize your accounting receipts and other documents by the month they occur.

6. Determine how you will record transactions

Manually recording transactions by hand is the most time-consuming option. And you should have a basic understanding of accounting before recording transactions in your books. Hiring an accountant seems like a good option but it can get expensive for a small business on a budget.

Take advantage of accounting software and let it do the hard work for you. Free Accounting software such as GnuCash can be ideal for a small business on a budget.

7. Schedule a time to do your bookkeeping

Stick to a bookkeeping schedule a time when you will record your business transactions, daily, weekly, or monthly. Don’t put off recording transactions until the last minute you will regret it!