The "gig economy" is generally referred to as an activity where taxpayers earn income by providing on-demand work, services, or goods. Often, this work is performed through a digital platform like an app or website. While there are many types of gig economy businesses, ride-sharing and home rentals are two of the most popular.
Here are some things gig economy workers should remember:
Income from these sources is taxable, regardless of whether an individual receives a Form 1099 or other information return. This is true even if the work is full-time, part-time, or if an individual is paid in cash.
Gig economy workers may also be required to make quarterly estimated income tax payments and pay their share of Social Security, Medicare, or Medicaid taxes. Thus, it is important for these taxpayers to remember to pay the right amount of taxes throughout the year to avoid owing a significant tax debt when filing their tax return.
While providing gig economy services, it is important for the taxpayer to be correctly classified as either an employee or an independent contractor. An employer typically withholds income taxes from their employees' wages to help cover income taxes the employees may owe. But this is not the case for an independent contractor. Taxpayers can use the worker classification page on IRS.gov to determine their appropriate classification.
Note also that independent contractors may be able to deduct business expenses, depending on tax limits and rules. Therefore, it is important for these taxpayers to keep good records of all business expenses.
Gig economy workers who are not considered employees have two ways to cover their income taxes:
Submit a new Form W-4 to their employer to have more income taxes withheld from their paycheck (but this can only be done if the worker has another job where he or she is classified as an employee); or
Make quarterly estimated tax payments to help pay their income taxes throughout the year, including self-employment tax.
The Gig Economy Tax Center on IRS.gov answers questions and helps gig economy taxpayers understand their tax responsibilities.
For more information, see the following resources: