The gig economy, also sometimes referred to as the sharing economy is a labor market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs. This sort of job is generally carried out through the use of digital platforms like an app or website. There are several forms of sharing economy enterprises, notably the two most prevalent ones: ride-sharing, Uber and Lyft, for instance, and property rentals such as Airbnb.
If taxpayers use one of the numerous online platforms to rent out a spare bedroom, arrange vehicle rides, or provide other products or services, they may be participating in the sharing or gig worker economy. Understanding how gig work affects taxes may appear difficult, but it does not have to be. Let’s look briefly at what taxpayers should bear in mind:
Income is Taxable
Taxpayers must record gig economy profits on their tax forms, whether it’s a full-time employment or a side business. Regardless of if an individual gets information returns, income from these sources is taxable. This is true whether the employment is full-time, part-time, or a side job, if a person is paid in cash, or if the gig worker receives an information return such as a Form 1099 or Form W2.
Taxpayers may also be obligated to pay quarterly anticipated income tax payments as well as contribute to Social Security, Medicare, or Medicaid. Individuals, including sole proprietors, partners, and S corporation owners, are normally required to make anticipated tax payments if they anticipate owing $1,000 or more in tax when their return is filed.
Renting Out Your Home
If a taxpayer leases out his house, apartment, or other dwelling but also resides in it throughout the year, special restrictions apply; this residential rental income could be taxed. Call PSACPA to learn more about your options.
The taxpayer must be accurately classified while offering gig economy services. This means the business or taxpayer must decide whether the person doing the services is a worker or a freelancer. To find out how they are categorized, taxpayers may go to IRS.gov and look at the worker classification page.
This is significant because, depending on tax restrictions and rules, some gig workers may be categorized as independent contractors and may be eligible to deduct business expenditures. To do so, independent contractors must keep detailed records of their company costs. A taxpayer who drives for work, for example, should keep a paper mileage journal (or use a mileage tracking software) since they frequently qualify to claim the standard mileage rate on their tax return. Its rate was 58.5 cents per mile (January 1-June 30, 2022) and 62.5 cents per mile (July 1-June 30, 2022). (July 1-December 31, 2022). The tariff will increase to 65.5 cents per mile in 2023.
Paying Taxes on Gig Income
Because gig economy income is taxable, people must be mindful of paying the correct amount of taxes throughout the year in order to avoid owing when they file. Income taxes are generally withheld from an employee’s salary to assist offset income taxes owed by the employee. Gig economy workers who are not considered employees, on the other hand, must pay taxes. There are two approaches to this:
If they have another work as an employee, they must submit a new Form W-4 to their employer to have extra income taxes taken from their paycheck.
Make quarterly anticipated tax payments to assist pay their income taxes, including self-employment tax, throughout the year.
If you have any queries concerning the sharing economy or your taxes, please contact us.