When you’re a gig worker, whether you drive for DoorDash or sell goods online, you need to be aware of the tax consequences involved in your work. This is true whether you have a “regular” job and do gig work on the side, or whether you rely on gig work for all of your income.Deal of the Day: Credit Karma Tax offers 100% free Federal and State tax filing with a Maximum Refund Guarantee and Audit Defense. Never pay a penny to file your income taxes. Read the Full Review Here
Here are a few tax tips for gig workers.
Table of Contents:
Separate Your Business and Personal Finances
The first thing to do is to separate your business finances from your personal finances. Set up a separate bank account for the money you earn from your business. Even if you stay a sole proprietor and, technically, your business and personal assets are all considered the same, it’s much easier to keep track of things if you have a degree of separation.
If you do decide to set up a business entity, like an LLC or an S-Corp., you might be able to open a business bank account and keep your money separate. If you can’t get a business bank account, though, you should still open a separate personal account for the money you earn from your business.
Need a recommendation? We suggest you check out Bank Novo, with almost no fees and no minimum balance requirement, this is a great place for small business owners to stash their cash. Read more in our Bank Novo Review.
Set up a process by which the money you earn from gig work is deposited into a specific account. You can do this with the apps when you set up your payment information, or you can connect your business account to Venmo, PayPal, or some other service you use. After the money has appeared in your business account, you can use that account to pay expenses (that might be deductible) or transfer money to your personal account in order to pay yourself.
This will make it easier to see your income and expenses during tax time and protect you in the event of an audit.
Make Quarterly Estimated Payments
As a gig worker, you’re going to have to pay self-employment tax on your income from these ventures. With a more traditional job, your employer will withhold money for payroll taxes, and even pay half of your FICA requirements.
Any money you make in the gig economy, though, requires you to pay both the employee and the employer side of payroll taxes. This is the self-employment tax, and the IRS expects you to pay what you owe each quarter.
Set up a bank account designed for paying quarterly estimated payments. One rule of thumb is to set aside about 30% of what you earn in an account to make these payments. Another strategy is to increase the withholding from your W-2 job if you have one. You can increase your withholding to reflect your potential taxes and those are automatically taken from your paycheck and sent to the IRS.
This can simplify things at tax time, but depending on what you make, you could still owe money.
Know What Tax Deductions You Can Claim
One of the best tax tips for gig workers is to understand the deductions you’re allowed to take. Depending on the type of work you’re doing, you might be able to deduct certain costs from your income.
For those who drive for gigs, such as doing DoorDash or Instacart, or driving for Lyft or Uber, it’s possible to deduct the mileage involved in your driving. However, you need to keep careful records of when you’re driving for business and when you’re driving for personal reasons. You can only deduct mileage for business driving.
You can also deduct the cost of supplies as well as other costs that might come up. If you have a home office and you do work from that office, you can even deduct the costs associated with that. For example, there’s a simplified method that allows you to deduct $5 for each square foot you use for home office space, up to 300 square feet ($1,500).
Save for Retirement
When working a regular job, you might have access to a retirement plan, and it might be relatively easy to remember to save–just have it deducted from your paycheck.
As a gig worker, especially if you don’t have an outside job, you might not remember to set money aside for retirement. This can be an issue if you plan to set aside money for your future. Open an IRA (Traditional, Roth, or SEP) and begin setting aside money for retirement. You can automatically transfer money from your bank account to a retirement account in order to save without thinking about it.
Depending on how your business is set up, you might need to first transfer money from your business account into your personal account, and make retirement contributions from your personal account.
Realize that there are tax benefits with your retirement savings as well. When you contribute to a Traditional IRA or SEP IRA, you can deduct your contributions on your taxes, reducing your overall liability. If you use a Roth IRA, you make your contributions after you pay taxes, but the money grows tax-free and you can withdraw it later without paying taxes on it.
Consider Your Health Insurance Choices
As a gig worker, you might need to think about health insurance. If you already have a job that offers you insurance benefits, you probably don’t need to get insurance on the exchange.
Shop for insurance options online: Try Policygenius
However, if you don’t have insurance through work, you can get insurance on the health insurance exchange. You can actually deduct some of what you pay in premiums as part of your business expenses in some cases.
Another strategy, even if you do have insurance coverage through work, is to see if you qualify for a Health Savings Account (HSA). With an HSA, you need a high-deductible plan, but if you qualify, you can set money aside and receive a tax deduction for your contributions. Plus, the money grows tax-free as long as you use it for qualified medical expenses.
Lively HSA is a great place to begin looking into an HSA. Lively allows you to save or invest with your HSA and there’s no cost to open an account or any monthly fees.
Open a Lively HSA or read our full Lively HSA review
Keep Good Records
As a gig worker, the most important thing you can do is keep good records for tax time. There are apps that can help you track the mileage you drive for business purposes, and you can use the statements from your business bank account to help you keep up with your income and expenses. There are also apps that allow you to snap images of your receipts and store them digitally.
No matter how you make your money as a gig worker, keep track of what’s going on with your business so that you have the records you need to prove to the IRS that you’re reporting your income accurately. In many cases, an audit just requires that you send in a piece of documentation. If you’ve kept good records, you can sort out those problems quickly and easily.
The gig economy offers you plenty of opportunities to make money, whether you’re doing it as a side hustle for extra income, or whether you actually use the gig economy to make money to survive on a regular basis.
However, it’s important to realize that the IRS wants its share of the tax revenue from this money, and you need to include tax planning as you participate in the gig economy.
The Best Free Tax Software
|Software||Federal eFile Cost||Best For|
|TurboTax||$0 to $150||Those who want extra guidance and advice while filing, along with an easy-to-use interface.|
|H&R Block||$0 to $139.99||Those at a higher risk of being audited, since they offer free in-person audit support.|
|TaxAct||$0 to $74.95||Those who want to save money but still need some guidance on taxes.|
|TaxSlayer||$0 to $47||Those who are confident in filing their taxes and want to save as much as possible.|
|FreeTaxUSA||$0 to $6.99||Those who want to save money when filing taxes more than anything else.|
|eSmart Tax||$44.95 - $89.95||Those who want to save but also have the security and backing of a trusted company.|
|e-File||$0 to $34.95||Those who have more complex tax situations but still want to save money.|