What your self-employed clients need to know about taxes in the gig economy

The gig economy is growing, offering flexibility for millions of workers — but it also brings tax responsibilities. This overview covers key tax basics gig workers need to know when reporting income and managing liabilities.

The gig economy continues to thrive, reshaping the landscape of the traditional workforce, with an estimated 40 million Americans working independently as freelancers, consultants, contractors and temporary workers, according to MBO Partners.

If your clients are among them, they may be enjoying the financial flexibility that comes with gig work. But they also bear responsibility for ensuring that they're managing their tax liability correctly when it comes to reporting income. Here, we'll review the basics of what your clients need to know about filing taxes as a gig worker.

Who needs to file taxes on gig work

One of the most confusing aspects of earning side income money for clients may be knowing when it's necessary to pay taxes on it. The IRS requires self-employed individuals to file an income tax return when net self-employment earnings are $400 or more.

Talk to your clients about the nature of the gig economy work they're doing. Explain that if they're working as an independent contractor, sole proprietor or running a part-time business, they're considered to be self-employed for IRS purposes and subject to the $400 net earnings threshold.

While independent contractors and other gig workers might receive a Form 1099 showing what they earned, that's not always the case. Make it clear that even if they're paid in cash or property, gig income is still reportable on a tax return.

Estimated taxes and gig worker income

In addition to knowing if they need to file taxes for gig earnings, clients also need to know when taxes must be paid. There are two tax obligations your clients should be aware of:

Filing an annual tax return (for state and federal taxes)
Making estimated quarterly payments (again, for both state and federal taxes)

Review with your clients what estimated payments are and when they're required. This is a good opportunity to talk to your clients about how much they're withholding at their 9-to-5 job and tracking their gig earnings.

Estimated payments are generally required for individuals who expect to owe $1,000 or more in taxes, so it's helpful for clients to have an idea of what they've already paid in from their regular paychecks. The IRS Tax Withholding Estimator can be useful in helping clients determine how much they should withhold on their W-4.

If you and your clients have determined that making estimated tax payments is necessary, walk them through the annual due dates for those payments and how to make them. Also, explain how penalties can apply if estimated taxes are underpaid or paid late.

Taking deductions against gig income

Depending on the nature of the work your client is doing, they may have certain expenses they can deduct at tax time. For example, if your client is doing landscaping work on the side, they may be able to deduct the cost of tools and supplies, or mileage when driving from job to job. A freelancer who works online may be able to write off the cost of a new laptop or claim a home office deduction.

These expenses are recorded on Schedule CO and it's important for your gig worker clients to keep good records of what they spend to run their side gig. Go over the IRS guidelines for record-keeping to help them understand what kind of documentation is necessary for proving any business deductions they plan to take.

Gig economy and the bigger tax picture

Earning extra money from doing gig work can be a boon for clients who may be trying to pay off student loans, save for a home or achieve another financial goal. But one thing they should understand is how reporting gig income, in addition to their regular income, could affect their tax bracket.

When discussing taxes with gig workers, it's important to review all the angles. For example, there may be other deductions they might qualify for that can help reduce their tax liability. Or contributing to a retirement account could help to offset some of the tax impacts of gig income. Focusing on both the short- and long-term can help your clients make the most of gig earnings while minimizing taxes.

For anything beyond the basics, make sure your client knows that they should consult a qualified tax professional.

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