Preparing for tax time and putting together the correct information can be intimidating. If you’ve never worked independently, just the words related to taxes can seem a bit unclear. Here are a few tax terms that gig and independent workers should know.
Record keeping
Record keeping, or bookkeeping, is the tracking of money related to your gig work. In a nutshell, record keeping involves tracking income (money coming in) and expenses (money going out for the purpose of doing business).
Your income includes everything you earn from your work, so if you have multiple jobs (like waiting tables and pet sitting) or work using multiple gig apps (like Uber and Lyft), you should count it all. Other sources of income might include any interest you earn on investments or rent someone pays you to live in a property you own.
Record keeping also requires tallying your work-related and subtracting that total what you’ve earned to find your true income. Tracking your expenses is also important because, as a gig worker, you can write off a lot of them to help lower your tax bill. When you write off your expenses, you’re using tax deductions.
Tax Deductions
Tax deductions are items that decrease the amount of income you have to pay taxes on. Many of the most common deductions for gig workers come from the expenses you pay while working, including:
- Mileage
- Health Insurance
- Home Office Deduction
- Work Supplies
- Travel
- Car Expenses
- Cell Phone
- Business Insurance
- Commissions or Fees
- Depreciation of Assets (Property, like computers, mobile phones and cars decrease in value year-after-year, which reduces the amount of the deduction)
But you may also be able to deduct other things, like donations to qualifying non-profit organizations, mortgage and student loan interest, and contributions to certain kinds of savings accounts like Health Savings Accounts (HSAs) and Individual Retirement Accounts (IRAs).
Tax Return
These are the detailed documents that outline your income and expenses for the previous year, and they’re typically due in April of each year. Once you complete and file your tax return, you’ll know how much you owe in taxes. If you’ve paid your quarterly taxes, however, the government might owe you some of that money back, or the total amount you owe might be reduced. You won’t know which until you file your tax return.
Independent and gig workers generally file a 1040 form with a supplemental form called a Schedule C. A 1040 is the form that most people fill out for their taxes, and it includes the basics about your income and expenses. Most gig workers will also need to fill out a Schedule C, which will ask for a further breakdown of your income and expenses and help you calculate any deductions you can take related to them.
Along with your tax return, you may also need to include any 1099 forms you received from anyone who paid you income. If you’re a Door Dasher, for example, DoorDash may send you a 1099 that says exactly how much you earned throughout the year. Checking your 1099s can help you calculate your income for the year, but not all companies send them to all workers, so keep your own records too.
If you’re not sure how to file your tax return, consider getting help from an accountant or using software like H&R Block.
Tax Withholding
If gig or freelance work is your side hustle and you have a full-time job too, you may need to consider how much taxes are withheld from your paycheck at your traditional job. Tax withholding is money employers hold back from employee paychecks, and it’s used to pay toward your federal and state income taxes to help you avoid a big tax bill in April.
The amount withheld is based on documentation you (the employee) provide to your employer via official forms. You can request a higher amount (if you think you’ll owe taxes at the end of the year) or lower amount (if you think you’ll get a big return) be withheld. Consider increasing your withholdings at your traditional employer to offset the extra income you earn from your gig work.
If you freelance full-time and don’t have a traditional employer to withhold taxes automatically, it’s helpful to set money aside each month for your estimated tax payment and pay quarterly estimated taxes. Depending on how much you earn, you may even be required to pay quarterly taxes.
Estimated Quarterly Tax
If you are an independent worker, you may be required to make quarterly estimated tax payments. These are payments you make four times during the year to the federal government (and possibly your state government). How much you pay is based on how much income (minus expenses) that you think you’ll earn this year as an independent worker.
Many gig workers use last year’s income as a starting point when estimating this year’s income, but an accountant or state and federal online resources can help you determine what estimates, if any, to pay.
The benefit of paying estimated taxes is that you may avoid penalties, reduce the likelihood of owing money at tax time and spread out your tax bill over time.
Have more tax questions?
Taxes for gig workers can be complicated, so consider consulting a tax professional or tax platform to help you maximize your tax savings and avoid mistakes on your tax returns. Or, if you’re ready to tackle your taxes yourself, online resources like Stride have additional tax guides for self-employed professionals here. Either way, you’re now better armed to understand the languages of taxes. Way to go!
