7 minute read
As of 2021, there were 17 million full-time gig workers in the US and 23.9 million occasional gig workers.
The gig economy has offered many individuals a viable alternative to a 9-5 career, giving them the option to make a successful living for themselves and their families without answering to an employer. Some people even like to take on freelance gigs while working a full-time job for some extra cash.
The benefits of working as a gig employee are endless – you can set your prices and choose your work hours. No wonder the last decade has seen a massive rise in the number of gig workers in the US.
With the recent tax reforms, self-employed gig employees have a lot to gain from freelancing. If you are already a freelancer or are seriously considering getting into the gig economy, you could benefit from being aware of the many incentives that come from self-employment.
Gig employment, which comprises freelance work, temporary gigs, and independent contracting, is a modern form of working. It has been considered unconventional by many but is now a widespread mode of employment. Gig workers are self-employed, which means they may pick and choose which jobs and projects they wish to work on. Freelancers often use online job platforms like LinkedIn, Craigslist, Fiverr, and Upwork to find new work.
Another great benefit of the freelancing/gig economy is that you can work on multiple projects simultaneously, as long as you have the time. Therefore, there is a potential to earn more than you would at a traditional 9-5 job. You can also set prices based on your skills and qualifications. So, it is possible to make a more-than-comfortable living solely from freelancing gigs.
However, there are some things worth knowing when paying taxes as a freelancer. Gig workers are typically taxed as self-employed individuals, which means they must record and file their taxes with the IRS rather than their company deducting their taxes from their paychecks and are responsible for the full amount of payroll taxes.
Common examples of gig employment include:
There are both professional and personal advantages of working in the gig economy. However, did you know that you could also benefit from tax incentives while working as a freelancer or remote assistant? Let’s look at some of the tax incentives that freelancers receive compared to full-time salaried employees.
The Medicare and Social Security taxes that must be paid by gig employees and freelancers are known as self-employment taxes. The self-employment tax rate stands at around 15.3%, including Medicare at 2.9% and Social Security at 12.4%.
The self-employment tax is usually split between the employer and the employee. Each is responsible for 7.65% of the total. Completely self-employed taxpayers are responsible for the total tax obligation. If your income exceeds a certain threshold, you will be subject to an additional 0.9% percent Medicare tax rate. The higher Medicare tax limitations apply to your combined salary, compensation, and self-employment income, not just your self-employment income.
No one enjoys paying extra taxes just because you work for yourself. The good news is that you can exclude 50% of your self-employment tax from your net earnings when estimating your income tax, significantly reducing the self-employment tax. That is because the employer component of the self-employment tax is treated as a business expense by the IRS, and you can exclude it as such.
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The tax changes in the 2017 Tax Cuts and Jobs Act were intended to help people, but then there are multiple changes intended to reduce tax obligation for businesses. However, the 20% deduction for qualified business income for eligible enterprises is one of the most noteworthy tax changes in this legislation.
This deduction lets self-employed individuals deduct up to 20% of their gross income, with adjustments. As a result, taxable income is reduced, lowering the taxes owed by a company. In addition, pass-throughs, such as partnerships, S-corporations, and limited liability companies (LLCs) can benefit from this deduction.
There are some restrictions on claiming the deduction for those who work in the service industry – including the medical, judicial, and financial fields. If you own a pass-through entity, file separately, and have taxable income of 7,500 or less for the year, you can generally claim the full 20% deduction. If you are a married couple filing a combined return, the income limit rises to $315,000.
Many gig workers and online assistants work from home, but did you know that you are eligible for a home office tax deduction as a freelancer? This one is a little tricky to grasp at first but will help you save money on taxes.
If you need to present information to verify your deduction, including the size workspace in square footage, you can draw a diagram of your workspace with measurements.
You can also deduct a portion of housing-related expenses, including homeowners insurance, home depreciation, utilities, mortgage interest, and repairs you pay over the year. These are all expenses that support the office space itself.
If your home office setup takes up 10% of the total of your living space, for example, 10% of your monthly electricity expense can be tax-deductible. Unfortunately, these deductions are only available to people who own their home office space rather than rent.
Keep in mind that you must still pay income tax on freelancing or gig income. If you have a full-time job in addition to your gig work, make sure your employer sets aside enough taxes from your salary to meet any additional tax that may be payable on your gig earnings. If you don’t, you’ll have to pay twice – for self-employment taxes and income tax on your earnings. As of 2018, if you earn $400 or more through self-employment, you must pay self-employment tax.
If you want to go full-time in the gig economy, you’ll need to budget for quarterly tax payments. The IRS requires self-employed individuals to pay their taxes in four installments throughout the year. If you don’t pay on time, or if you don’t pay the right amount, the IRS might charge you a penalty and interest, which will be added to your tax bill.
It’s always best to consult with a tax professional who can guide you through the tax-paying process, especially if you are just starting in the gig economy. Your tax advisor can use tax planning software, like Corvee, to uncover tax savings you may not have been aware of.
There are plenty of incentives that can motivate anyone to get into the gig economy, whether full-time or while pursuing a traditional salaried job. The important thing is to stay informed of your rights as a self-employed individual and save money wherever you can. We understand that self-employed taxes can be complicated, so we suggest you work with a tax professional to avoid tax-related complications.
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