Gig Work Can Have Tax Consequences You Never Considered
- Learn about the tax consequences of gig work.
- Find out why you may want to make quarterly tax payments.
- Learn the importance of keeping receipts.
- Find out why gig workers may want to seek professional tax advice.
Over the last decade, in particular, the definition of the term "career" has changed. Rather than being employed by a single entity for which you receive a W2 at the end of the year, many are now participating in the "gig economy" in a variety of ways. They're not just working a day job. They also drive for a ride-sharing service like Uber. Maybe they deliver food for companies like DoorDash. In short, they're leaning into the versatility that the fast-paced digital world has brought with it. With gig work, they’re enjoying the type of freedom that people didn't previously have.
Of course, this newfound sense of freedom brings with it a number of potential disadvantages. This will become especially apparent when it comes to tax season. Thankfully, you can still enjoy the benefits of the gig economy with as few of the potential tax-related downsides as possible. You just need to be savvy about planning ahead. You also need to keep a few key things in mind along the way.
Taxes and Gig Work: An Overview
By far, the most important thing to understand about this process is that any time you increase your income, it will always potentially increase your taxes. This is true if you’re picking up gig work in addition to your primary job or getting additional employment where you receive a second W2 form at the end of the year.
For the sake of example, let's say that yours is a situation where you A) work for a small business, and B) also run a business like those found on Etsy on the side. The first source of employment would almost certainly give you a W2 at the end of the year. In the second, you'd be left with self-employment income. This itself increases your tax liability almost immediately.
Quarterly estimated payments
In that situation, you may (depending on the amount of income) want to pay quarterly estimated tax payments using form 1040-ES. You may want to increase your income tax withholding at your W2 job as much as possible to offset the liability of your self-employment income. You may also want to do a combination of both. Yes, this means a little less money in your pocket right now. However, would you rather receive a major tax bill at the end of the year?
Keep the receipts
Along the same lines, you want to make sure that you're always keeping receipts for expenses related to your self-employment job. This way, you can write off as much as possible at the end of the year. In the Uber example, that would include at least a percentage of any maintenance and other work that you've done to your car. In other "gig economy" examples, that might include money that you've spent on supplies expressly needed to complete this second job.
If you use your car for your gig work, you should keep a journal of all the miles traveled. This, too, will help give you write-offs so that you can reduce your income tax liability moving forward.
Why Gig Workers Might Need Professional Tax Advice
Overall, your taxes are almost certainly going to be more complicated if you have gig work. You need to think about how much is being withheld from every paycheck from your primary job. However, you also have an increased liability when it comes to things like Social Security tax, Medicare tax, and more. As an employee, half of that would be paid by your traditional employer. In a self-employed situation, you're responsible for both sides of the equation.
That's why, if you have any questions or if you just aren't sure how to proceed, you shouldn't be afraid to enlist the help of a Fiducial professional. Not only can they help you reduce your tax liability as much as possible, but they can also maximize your overall income, so you're taking home every dollar that you've earned without being concerned about getting hit with a tax bill that you can't handle down the road.
When it comes to gig work, tax planning is key
In the end, gig work is certainly something to be celebrated – after all, it gives people freedom when it comes to how their careers play out that would have been unthinkable even as recently as a decade ago. Having said that, it certainly isn't without its potential consequences – but with the right approach, you can still take them into consideration and enjoy all the advantages of gig work simultaneously.
Want to find out more information about the tax consequences of gig work? Would you like to speak to someone about your own needs in a bit more detail? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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