Gig work has been getting more popular, especially during the pandemic. A recent survey from freelance job platform Upwork found 36% of the U.S. workforce did freelance work in the past year.
But if you're new to gig work, you may not have a good understanding of how that impacts your taxes.
Tax filing is open now, so we want to help you out. You may face a shock with the self-employment tax rate. For 2020, it's 15.3% on the first $137,700 of net income.
This is not the same as income tax.
You can help offset this by claiming your expenses. If you haven't been tracking them since you started gig work, you can try to reconstruct them.
“So, a lot of times, you can go to bank records, look at your credit card statements, if you have a glove box, full of receipts, it's not a fun process, but you can reconstruct a lot of those expenses likewise with your mileage. You may be able to reconstruct those and if you're working for a platform, make sure you check and see what they might have tracked for you on your behalf,” said Andy Phillips, Director of The Tax Institute at H&R Block.
If you're a W-2 employee working from home, you're not eligible to deduct expenses that are not reimbursed by your employer. But gig workers can deduct home office expenses.
“For home office deductions for small business owners, including folks that are maybe working in a gig space, where they do work from home, you know, that your home office space has to be used both continually and exclusively for business to be able to deduct some of those expenses.”
Another question that's going to come up is what forms to fill out. You may have received a 1099-K or a 1099-NEC. Or you may not have received anything.
“Even if you don't get a 1099 of any type, that income is still taxable. So again, it goes back to record-keeping. If you didn't get a 1099, those platforms should have a good account statement showing the payments you received during the year, so that's going to be your backup. You're going to use that to prepare your return and you're going to keep that to substantiate your income should your state or the IRS have any questions.”
Two ways to get a faster tax refund are filing electronically and making sure you're avoiding any mistakes on your taxes.
You may be more likely to make mistakes if you're in a new tax situation, so this could be the year to get help from a professional. There are virtual options if you're not comfortable going in person.