Over the last five years, the gig economy has grown quickly, and with that, so has the number of gig workers. In 2019 alone, over one-third of Americans participated in some form of gig work. That’s more than double the 14.1% of Americans who worked a side hustle in 2014.
This growth isn’t a complete surprise considering the average gig job can mean quick money without the added stress of a second full-time job. If you are one of the millions of American gig workers, filing your taxes might seem daunting this year, but it doesn’t have to be. Start utilizing these five tips to make preparing your taxes quick and easy.
tax tips for gig workers
1. Use the Correct Tax Forms
If you earned more than $400 last year with your side job, you would have to file a tax return on that income. Since you won’t be receiving a standard W-2 from your gig, you will have to file as an independent contractor, even if you received a W-2 from your full-time job.
Instead, you might receive a 1099 form for your gig earnings. While there are several varieties of this form, the most common two for a gig worker are a 1099-MISC for miscellaneous income and a 1099-K for third party network transactions. A 1099-MISC is typically used when you earn more than $600 from a specific business, but if you earned less than that from your gig, you most likely wouldn’t receive one.
If you didn’t receive either one of these forms, you would have to self-report your income through payment records. The same is true if you were paid in cash or virtual currency throughout the year. When you go to file your taxes, you will have to use a 1040 or 1040-EZ form to report your earnings.
2. Set Aside Money Ahead of Time
When you are earning money from a side gig, you might not be paying income tax immediately. Just like a business, you will have to calculate your taxes yourself. To avoid getting surprised by a large tax bill in April, you should prepare ahead of time by setting aside money throughout the year.
As soon as you start your side job, set up a dedicated savings account. To ensure your savings aren’t being depleted, search for a bank without hidden fees. You can then create a schedule of small payments to be deposited into your account without having to pay any minimum balance or monthly maintenance fees. When you go to file your return, you will then have money to pay the IRS for any income tax you might owe.
3. Take Advantage of Available Tax Deductions
As an independent contractor, you will have access to exclusive deductions offered by the IRS. You can claim such deductions as home office costs, car mileage, advertising expenses, and any membership fees to professional organizations.
To make the most of your tax return, you should spend some time investigating which tax deductions work best for your situation. A few minutes of research can mean hundreds of dollars added to your refund check.
4. File Your Taxes Early
As soon as you can, you should prepare and file your tax return. This not only gets your refund to you faster, but can help you avoid the need to file for an extension. On the other hand, if you don’t have a tax return coming and owe taxes, you will have more time to pay your bill to the IRS.
Filing early can also help you prevent any tax-time identity fraud. Each year there are millions of people who have their tax return stolen. To help prevent tax return theft, the IRS recommends filing your tax return early.
5. Stay Organized and Keep Records
Tax season is stressful enough without having to search for necessary documents. Keeping your records organized will make preparing your taxes faster and easier. If you haven’t already, create a file folder system to separate your different forms.
If you are using your own records for reporting your income, consider keeping all your payment documents in a binder. This not only keeps your receipts together but can allow you to store them chronologically, in case you need to refer back to a specific time period.
As a gig worker, you’re part of a growing group of professionals trying to earn more money. Soon gig workers will outnumber traditional workers in the office, and it’s easy to see why. A gig job can provide easy money made on your own schedule. But don’t let tax season overwhelm you when it comes time to report that extra income. By keeping organized and submitting your tax return early, you can save yourself time and money.