Side hustling and gig work are becoming a way of life for many Americans. Gig work can help you pay off debt, diversify your income, and provide valuable work experience. But freelancers and contractors can face some problems when it comes to filing taxes.
In partnership with H&R Block, we’re going to talk about the six things that gig workers, freelancers, contractors, and other self-employed people need to know when filing taxes.
H&R Block is an awesome tool for helping gig workers handle their taxes. From an easy to use online tool, to all the support options you need, Block is a great tool for your taxes. Check out H&R Block here >>
What Gig Workers And Independent Contractors Need To Know For Taxes
Filing taxes can be a little more complicated when you’re self-employed. Here are six things that gig workers, freelancers, and independent contractors need to know to prepare for tax season.
1. Look For Your 1099-NEC Forms In The Mail
Form 1099-NEC is an IRS form used to report compensation to people who aren’t employees. Companies that hire freelancers or gig workers are generally expected to send 1099-NEC forms to all contractors who were paid at least $600. Most companies will send these forms out by late January or early February. You need these forms to fill out your taxes.
If you contracted with a company, and it hasn’t sent you a 1099-NEC by early February, contact the company to discuss it. The company may not be obligated to provide the form because you sold or invoiced services through a third-party (for example PayPal). Or you may have earned less than $600.
If you don’t get a 1099-NEC from a company, you still need to report the income the company paid to you.
The best option for figuring out the amount paid to you is simply to keep your own records, by using a bookkeeper or bookkeeping software.
Even better, H&R Block allows you to import your information from various companies like Uber. If you drive for Uber, this could be a simple solution to your taxes!
2. Cash Income Is Still Income
Of course, not all income comes from invoices. Whether you babysit, mow lawns, shovel snow, or sell snow cones at local fairs, there’s a chance that some of your revenue came as cash. That income still counts as income. It is important to track that income and report it to the IRS on your 1040.
Most tax software makes reporting cash income easy. These programs will simply have one box to input all your cash income. The tough part is keeping track of that income. There are many ways to track your cash income – you can track business income and expenses in spreadsheets or accounting software like Wave. This can make tax time a lot easier.
3. Keep Great Records
Filling out taxes as a self-employed person is surprisingly easy (especially if you use great tax software like H&R Block). However, all your income and expenses must be documented. This includes documenting expenses such as cell phone bills or internet bills if you use those for your business.
It is absolutely essential to have written documentation of all your income and the expenses that you’re writing off for your business. If you don’t have documentation, you could lose all those write-offs in an audit.
Documentation includes any official paper or electronic receipts and logs (for mileage for example). Whether you use paper or spreadsheets, keep everything in one place for easier tax prep. This article gives specific documentation tips to help you know what to track and how.
4. Beware Of The “Double” Payroll Taxes
As a gig worker, you are both an “employee” and an “employer”. That means you have to pay both sides of the Social Security and Medicare Taxes (payroll taxes) – or FICA taxes that employees pay.
Instead of FICA, gig workers and other self-employed people pay self-employment taxes. Social security tax is 6.2% of an employee’s wages for both the employer and the employee. For gig workers, that’s 12.4% of profits. The Medicare tax is 1.45% of an employee’s wages or 2.9% of all profits.
All told, gig workers need to pay 15.3% of profits of at least $400 for self-employment taxes plus Federal Income tax plus state and local taxes.
As you earn money all year, make sure you’re setting money aside for these taxes!
5. Plan To Pay Quarterly Taxes
Most gig workers and self-employed people don’t know about quarterly tax payments when they first start gigging. However, self-employed people (including freelancers, contractors, gig workers, etc.) are supposed to make . Making estimated tax payments throughout the year will keep you from having one massive tax bill at the end of the year.
If you did freelance work all year, you may have missed all four quarterly payment due dates last year. But that’s no need to stress. This year, plan to make all four quarterly payments, even if you owe back taxes to the IRS. That way you won’t dig yourself deeper into a hole. The first 2021 quarterly payment is due 4/15.
If you do make quarterly payments, make sure you’re inputting them in your tax software when you file. Programs like H&R Block make it easy.
6. Even If You Can’t Pay At All, File On Time!
A lot of first-time freelancers (and even experienced freelancers) end up in tax debt. If you owe back taxes, you will still want to file your taxes on time. Failing to file can lead to penalties and penalty interest.
As long as you file on time, you have options for repaying the back taxes.
If you’re new to gig work, it can be overwhelming to think about your taxes. And it could be a shock when you first do them. That’s why it’s essential that you use tax software that can help you if you need assistance.
We love H&R Block, and named them our best overall tax software for 2021. The reason? They have a great, easy-to-use interface, and they combine that with a ton of different support options – from live chat, to virtual tax prep, to in-person offices.
If you need help preparing your first tax return as a gig worker, or maybe your freelance business took off in 2020 and your taxes are just more complex than before, check out H&R Block.