If You're a Gig Worker You Need to Know This About Your Taxes

There has never been more freelance work, or gig work, available than there is right now. Millions of Americans who want additional income, flexibility, and new opportunities are turning to gig work as either a side hustle or a full-time job opportunity.

Gig work can be very rewarding, but the tax implications of the gig economy are very different from W-2 employment. If you're new to earning self-employment income, here are some of the key concepts you should understand about how taxes work.

You (probably) need to make quarterly payments

If you are self-employed, you might be required to make quarterly estimated tax payments to the IRS. Specifically, if you expect to owe more than $1,000 in federal taxes for a given year, you are generally required to make quarterly payments. The IRS sets four deadlines -- typically April 15, June 15, Sept. 15, and Jan. 15 of the following year.

There are a few exceptions. For example, if your federal income tax withholding from a job is at least 90% of your total tax this year, you won't be penalized if you don't make quarterly estimated payments.

However, it's important to note that spreading out your payments throughout the year is generally better than getting hit with a large lump-sum tax bill when you file your return. So even if you're not technically required to make estimated payments, it's still a good idea if you anticipate that you'll owe a significant amount of money.

Self-employment tax can be costly

One thing many gig workers don't realize is that there's an additional tax if you're self-employed.

When you have a W-2 job, you only pay half of the Social Security and Medicare taxes based on your income. But if you have income from gig work, you are considered to be both the employer and the employee, and therefore are responsible for both sides of the tax. Social Security tax is only assessed on a certain amount of income, while Medicare tax is charged on every penny you earn. For 2023, here's how these taxes (collectively known as the Self-Employment Tax) break down:

• 15.3% on the first $160,200 of net earnings
• 2.9% of any net earnings in excess of $160,200

You have some valuable tax breaks available to you

It isn't all bad news for gig workers. There are some valuable tax breaks that people with self-employment income qualify for. Just to name a few common examples:

• Retirement plans: If you have self-employment income, you have access to certain types of retirement accounts with higher contribution limits than traditional and Roth IRAs have, such as the SIMPLE IRA and SEP-IRA.
• Home office: If you use a room in your home exclusively for your gig employment, you may be able to claim a home office deduction.
• Mileage: If your gig work requires you to drive from one place to another, you may be able to deduct the IRS's mileage rate.
• Qualified Business Income (QBI) deduction: This was part of the 2018 tax reform and essentially allows gig workers to deduct as much as 20% of their self-employment income.

Smart planning can make all the difference

In my first full year as a freelance worker (the term "gig worker" didn't really exist back then), I was shocked when I was hit with a $14,000 tax bill in April when tax time rolled around. The reason is that having never done anything besides W-2 work and being several years off from even considering becoming a financial planner, I had no idea about any of these things. I didn't know to make quarterly tax payments, I had no clue that self-employment tax added thousands of dollars in tax liability, and I didn't know about self-employed retirement options and other valuable tax breaks.

With that in mind, if you're relatively new to being a gig worker, or simply want to do a better job of planning for and reducing your tax bill, understanding these three important concepts can put you in a great position to do just that.