I landed my first job as an independent contractor at age 12, although, technically, I was a subcontractor. My older brother mowed lawns in our neighborhood, and whenever he could not do the work, I filled in.
It wasn’t easy. It was hot and humid in the summer, often reaching over 100 degrees Fahrenheit. We had a push mower, and since we were too young to drive, that meant pushing the mower to the property—sometimes a mile or so away—with the gas can strapped to the top before the work could even begin.
But I got paid for work on a schedule I picked. It was a heady feeling. And one I would remember when, later, I had the opportunity to do some freelance writing and speaking.
Chances are that you’ve had a side gig or freelance job at some point, too. A study by Upwork and Freelancers Union estimated that over a third of the US workforce—36%, or 57.3 million Americans—were freelancing in 2017.
Those numbers were slated to grow to most of the workforce by 2027, though the pandemic has altered many plans.
Freelance work remains appealing for many Americans with its combination of income and flexibility. If you’re a member of the growing gig economy, here’s what you need to know about taxes.
There is no “per job” reporting threshold
There’s a persistent rumor that you only have to report individual payments of $600 or more on your tax return. I suspect that’s related to the Form 1099-NEC (formerly Form 1099-MISC for non-employee compensation) reporting threshold. But you must report all income received from your freelance work on your tax return, even if you do not receive a corroborative form from the payer.
Keep great records
The IRS requires you to keep adequate proof of income and expenses. You want to be able to verify your income and your expenses. Some companies, like certain ride-sharing businesses, will track information for you and send you an informational form. But even if you don’t receive a form, you’ll need to report your income—and of course, offset that income with related expenses.
It’s easiest to do this contemporaneously rather than try to make sense of it all later. You can record your time worked, gigs played, and mileage driven in an old-school journal or digital app. If you have a deposit account and credit card for business that you maintain separately from your personal banking, it helps to keep records neat. And when it comes to costs, keep receipts and annotate the nature of the expense—you can write a description on the receipt and save or scan it for tax time.
You may need to make estimated payments
If you’re a W-2 employee, your employer will withhold tax from your pay. But in the gig economy, you’re responsible for paying your own tax as you go. If you have another job subject to withholding, you may be to do this by having that employer take more tax out of your check—you’d signal this by submitting a revised Form W-4. You can also make quarterly estimated tax payments.
Typically, if you expect to owe more than $1,000 at tax time, you’ll want to make estimated payments using Form 1040-ES.
Estimated taxes are paid quarterly. The due dates for the 2022 tax year are April 18, 2022; June 15, 2022; Sept. 15, 2022; and Jan. 17, 2023. You don’t have to make the January payment if you file your 2022 tax return by Jan. 31, 2023, and pay the entire balance due with your return. If you skip a payment or pay late, you may be subject to a penalty.
Understand your deductions
I get a lot of specific questions about business-related deductions. The reality is that there is no definitive list; it’s facts and circumstances dependent. No matter the type of cost, the deductibility of business expenses hinges on two questions:
- Is this for business use?
- Is it an ordinary (common and accepted in your industry) and necessary (helpful and appropriate for your trade or business) expense?
The answer to both of those questions should be yes to claim an expense as a business-related tax deduction under Section 162 of the tax code—assuming no exceptions apply.
Mixed-use expenses can be deductible
Typically, you can only deduct expenses that are primarily for business use. But sometimes, you may have items like your cellphone or car used for business and personal reasons. In those cases, you can typically deduct the business portion of the expense—you’ll want to keep excellent records and note the percentage used for business. Some exceptions apply—for example, the IRS always considers a primary home landline personal, even if it’s used solely for business.
Freelancers can still deduct business expenses
It’s also important to note that while tax reform made some significant changes to Schedule A, like eliminating the home office deduction and unreimbursed business expenses on that schedule, those deductions remain allowable on Schedule C. For example, while employees may no longer claim a deduction for the use of a home office, the home office expense rules for self-employed persons and independent contractors did not change. If you are self-employed—including as a freelancer or gig worker—you can continue to deduct qualifying home office expenses. Typically, you would report the home office deduction on Form 8829, filed along with your Schedule C on your 1040.
Hobby loss rules may apply
How you classify your side gig—as a business or hobby—can impact the tax consequences.
Business income is reported on a Schedule C and is subject to self-employment tax. Hobby income is reported on Schedule 1 as other income and is not subject to self-employment tax.
Expenses are also treated a bit differently. Business expenses reported on a Schedule C are typically not limited. In addition to being able to offset your income with those deductions, if the deductions exceed your income, you can carry losses forward or back to other years. However, if you earn income in the pursuit of a hobby, there are limits. You can still offset your income with deductions, but you cannot claim deductions that exceed your income. There’s no allowable loss for a hobby.
The IRS looks at several factors to determine whether a gig is a hobby or a loss. Those include whether you expect to make money—if so, it’s typically a business—and whether you put much time and effort into the enterprise—if you don’t, it’s likely a hobby. You can find more details at Reg. Sec. 1.183-2(b).
You can still save for retirement
Employees generally have an opportunity to contribute to a retirement account through their employer. As a self-employed person or freelancer, you don’t have that option—but that doesn’t mean that there aren’t tax-favored options for you to save for retirement. Some of the most popular options for freelancers include a solo 401(k) plan or a Savings Incentive Match Plan for Employees (SIMPLE IRA).
A solo 401(k) plan is similar to an employer-sponsored plan. The difference is that you act as both employee and employer when making contributions. That means that you can defer up to 100% of your earned income for self-employment purposes up to the annual contribution limit—$20,500 in 2022, or $27,000 if age 50 or over—as the employee, plus a calculation of your employer’s nonelective contribution. You can use the rate table or worksheets in IRS Pub. 560 to figure the rate. Your total contributions, not counting catch-up contributions for those age 50 and over, cannot exceed $61,000 for 2022.
An alternative is a SIMPLE IRA. You can put all of your net self-employment earnings in a SIMPLE IRA up to the limits—those are $14,000 in 2022 (you can add up to $3,000 more if you’re 50 or older) plus either a 2% fixed contribution or a 3% matching contribution. Contributions vest immediately, and there are no additional reporting requirements. A quick downside: A SIMPLE IRA cannot be a Roth IRA.
The rules for retirement plans can be complicated, so if you’re not familiar with the details, it’s best to consult with a tax professional who focuses on retirement plans.
Help is available
Freelancing questions can be tricky. A significant majority of my clients who found themselves in tax trouble had issues related to unreported or underreported income or missed payments. It can be tempting to skip estimated payments and figure you’ll catch up later… until later arrives and you can’t get compliant.
To avoid getting into trouble, stay informed and don’t be afraid to ask for help. For more resources, check out the Gig Economy Tax Center on the IRS website.
This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.