If you made extra income on the side last year, such as by selling an amazing piece of artwork or walking your neighbor’s dog, then you are one of the more than 58 million gig workers, freelancers and other self-employed workers in the United States.
Just because you may not be an employee of a company, doesn’t mean that you are exempt from paying taxes. The IRS expects you to pay taxes on your self-employment income just as it expects traditional workers to pay taxes on the income they receive from their employers.
But the process of paying taxes on self-employment income can be a lot more complicated than paying taxes on traditional income from an employer.
Here’s what everyone who earns gig, freelance or any other type of self-employment income — whether part time or full time — needs to know about federal income taxes.
1. Your income is taxable
Again, self-employment income of any sort generally is taxable and must be reported on your federal tax return. This is the case even if you didn’t receive any earnings statements, such as the following, from the entities through which you earned gig, freelance or other self-employment income:
- Form 1099-MISC (which is for miscellaneous income)
- Form 1099-NEC (for nonemployee compensation)
- Form 1099-K (for payment card and third-party network transactions, which can include income earned through gig-work platforms, such as Airbnb and Uber)
Due to a recent change by the IRS, you might not have received a Form 1099-K for applicable income earned in 2022. However, the IRS still expects you to report that income.
If your net earnings from self-employment work in 2022 was at least $400, you must report that income on a Schedule C, which is the name of a special form that you attach to and submit with your tax return.
2. You are responsible for withholding
Gig workers and freelancers are considered self-employed, and all self-employed workers are responsible for paying their own taxes — unlike when you work for a company that withholds income taxes as well as Social Security and Medicare taxes from your paychecks. So you will need to make quarterly tax payments by submitting a Form 1040-ES, Estimated Tax for Individuals to the IRS.
Since self-employed workers are required to pay taxes every quarter, as opposed to once a year, not paying enough taxes each quarter can lead to an underpayment penalty at tax time. According to the IRS:
“Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.”
3. Keeping detailed records is crucial
Your income is not the only thing you need to track when you’re self-employed. Also log all of your expenses related to your gig, freelance or other self-employed work, including keeping copies of all receipts. Because when it’s time to file your annual tax return, you can deduct qualifying self-employment expenses, thereby lowering your taxable income.
Self-employment expense deductions are like other federal tax deductions in that their value is equivalent to your tax rate. If your federal income tax rate is 22%, for example, every dollar you can deduct on your Schedule C saves you 22 cents in taxes. It pays to keep all of your receipts!
Not sure what else you should document? Visit the IRS’ Recordkeeping page for the self-employed and small businesses.
Not sure what you can deduct? See Part II of the Schedule C instructions, or consider consulting a tax professional. Hiring a pro will cost you, of course, but it also might help you avoid an audit, which we’ll get to next.
4. You’re more likely to get audited
Taxpayers who file a Schedule C are more likely to get audited. If that happens, the IRS will require proof of all your deducted expenses, so this is another reason to make sure you keep detailed records.
Also, be certain that the expenses you deduct are indeed business expenses, not personal ones, because the IRS scrutinizes Schedule C expenses with this in mind. The agency’s manual for Schedule C correspondence examinations — which are essentially mail-based audits of Schedule C filers — states:
“Because the taxpayers are not accountable to anyone as sole proprietors there are opportunities for them to mix personal and business interests in the pursuit of their trade or business. It is incumbent on the examiner to recognize those instances where personal expenditures are being deducted as business expenses and to make the proper adjustments to the taxpayer’s return.”
5. You have a choice to make about car costs
If you use your car for business, you likely will have to decide between two options for deducting your car-related expenses.
- Standard mileage rate: If you are eligible for this option and choose to claim the standard mileage rate, you can deduct qualifying miles at a rate of 58.5 cents per mile driven in January through June 2022 and 62.5 cents per mile driven in July through December 2022. However, you cannot claim other vehicle expenses.
- Actual expenses: If you choose this option, “you must determine what it actually costs to operate the car for the portion of the overall use of the car that’s business use,” according to the IRS. That can include “gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.”
Parking fees and tolls that you incur for business can be deducted separately. That means you can deduct them regardless of whether you deduct other car-related expenses via the standard mileage rate or actual expenses.
6. Learn everything else that’s deductible
Even if you don’t use your car for business, you might be surprised at the array of expenses that might be deductible for you, depending on the nature of your gig, freelance or other self-employment work.
Taking a course or two to increase your marketing skills for your business, for example? You can deduct those as an expense. If you ordered business cards and other marketing materials, you can deduct those, too. If this is your first time a Schedule C, check other the IRS’ Gig Economy Tax Center to learn more.