No matter what you call it — gig work, side hustle, freelance — if you earn income of $400 or more in a year, you’ll have to pay federal taxes on those earnings, along with contributions to Social Security and Medicare.
Figuring out what you owe can be especially tricky if you just started doing gig work, if you haven’t kept good records or if you haven’t set aside money during the year to cover your annual tax bill.
These tips from the Internal Revenue Service (IRS) can help you complete your taxes if you’re a gig worker and if you earn income from work that may not provide you with a W-2 or 1099 tax form at the end of the year.
What counts as gig work?
Roughly 57 million people a year do gig or freelance work in the United States, according to research firm Statista. Part of the reason so many Americans fit into this category is that the range of jobs that fit this description is so broad. Many gig opportunities use smartphone apps or websites to connect you with people who want to pay you for goods or services. But short-term work that you find on your own could also be considered gig work. In general, these jobs include (but certainly are not limited to) some of the following:
- Driving people or deliveries in your car;
- Selling products or crafts online;
- Renting your home or other property for short-term use;
- Using your skills and experience to provide temporary, contract or freelance work;
- Running errands, dog walking or providing similar services for others;
- Renting out your car or other equipment.
I do gig work, but I also got some unemployment benefits in 2020. Do I have to pay taxes on those benefits?
In general, you would, but there is a big exception for 2020. Thanks to stimulus legislation passed in March, if you earned less than $150,000 in adjusted gross income (AGI) last year, you won’t have to pay federal income taxes on the first $10,200 you received in unemployment benefits. According to the Century Foundation, 40 million people collected unemployment benefits in 2020, with the average amount totaling $14,000.
Even better, the IRS recently announced that you can exclude that $10,200 altogether when you’re figuring out your modified AGI. That means that some people who may have passed the $150,000 threshold for eligibility may now qualify for that $10,200 unemployment-benefits exemption. On March 31, the IRS announced it would automatically provide refunds to any eligible individuals who filed their 2020 taxes before this deduction took effect in mid-March. The agency says eligible individuals should expect those refunds to arrive starting in mid-May and continuing through the summer.
You should receive a 1099-G tax form telling you the total amount you received in unemployment benefits.
Both the Pandemic Unemployment Assistance program — which made gig workers nationwide eligible for unemployment benefits — and the $10,200 tax-free exception were created by federal pandemic relief legislation. That means it’s not completely clear how gig workers should plan for the 2021 tax year. Enhanced unemployment benefits have been extended through Sept. 6, 2021, but the $10,200 tax break is currently available only for benefits collected in 2020.
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One note: As always, you don’t have to pay Social Security and Medicare taxes on unemployment benefits.
What tax forms do I need to file?
If you earned more than $400 in 2020 through gig or freelance work, you will need to file Schedule SE, in addition to Form 1040 or Form 1040 SR. The SE in that form stands for “self employed.” It’s the document you’ll use to figure out how much of the money you made working for yourself should be taxed.
Be aware that the tax hit for being self-employed may seem worse than it was for jobs in which you worked for an employer. When you have an employer, in most cases you and the company evenly split the amount that you are required to contribute to Social Security and Medicare. When you are self-employed, you are expected to cover the full 12.4 percent for Social Security (if you earned $137,700 or less) and 2.9 percent for Medicare, but you can also deduct the half that would be paid by an employer.
If you are doing gig work, there are a few ways you can plan ahead to avoid a big self-employed tax bill at the end of the year.
- You can make quarterly estimated tax payments throughout the year using Form 1040-ES (Estimated Taxes for Individuals) or Form 1040-ES (NR) (U.S. Estimated Tax for Nonresident Alien Individuals). Estimated taxes are due on four dates: April 15, June 15, Sept. 15 and Jan. 15.
- If you have an employer and do gig work on the side, you can adjust your withholding on your W-4 form with your employer so that it also effectively withholds taxes on your self-employment income. You can use the IRS’ Tax Withholding Estimator to figure out how much you should adjust your W-4 with your company.
- Make sure to keep good records of all the expenses from your self-employed/gig work throughout the year. These documents can be used for valuable deductions come tax time.
What deductions can I take?
You may be able to deduct many of the expenses related to your self-employed work, but only if you keep good records. For instance, you can take a deduction for your cellphone, but only for the portion of the bill that pertains to your gig work — not the full amount. Similarly, you can take a deduction if you work from a home office; however, it must be a dedicated space used primarily for your self-employed work, not just a desk in your living room. In any case, you’ll need backup receipts and records, in case the IRS wants further proof of your expenses.
One big deduction you should make sure to take is the half of the Social Security and Medicare taxes that would normally be paid by an employer. That deduction is worth roughly 7.65 percent of your pretax income if you earned less than $137,700 in 2020. You may also be able to claim a deduction for your health insurance costs.
Kenneth Terrell covers employment, age discrimination, work and jobs, careers and Congress for AARP. He previously worked for the Education Writers Association and U.S. News & World Report, where he reported on government and politics, business, education, science and technology, and lifestyle news.
Editor’s Note: This article originally was published on March 26, 2021. It has been updated with more recent information from the Internal Revenue Service.