The Rundown On Gig Work And The Self-Employment Tax

If you make money in self-employment online or offline including in the gig economy the money you make may be taxable. 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.” 

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

  • Drive a car for booked rides or deliveries 
  • Rent out property or part of it
  • Run errands or complete tasks 
  • Sell goods online 
  • Provide creative or professional services
  • Provide other temporary, on-demand
  • Freelance work

People working in the gig economy use Digital platforms. Digital platforms are businesses 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

Examples of Gig platforms connecting service providers with customers, or gig workers, are too numerous to list here, so I will only mention a couple of popular gig platforms. Etsy and Uber. Gig economy workers are generally classified as independent contractors, though California has been working on laws limiting this classification.

THE SELF EMPLOYMENT TAX

Generally, 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.

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.

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
  • W2 Statements

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,
  • W2 Statements
  • Paid in any form, including cash, property, goods, or virtual currency
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 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.

  1. You expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits.
  2. 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.