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.

Generally, if your net earnings from self-employment are $400 or more, you are generally required to file a federal income tax return and pay self-employment tax (Social Security and Medicare), even if you have no other income. You must report these earnings on Schedule SE (Form 1040). 

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.