Tax Tips for Freelancers and Gig Workers

Working for yourself offers so many benefits: flexibility, the opportunity to be creative, and control over your own career and future. The flip side, of course, is that you are responsible for everything—including figuring out your income taxes. Whether your freelance work is on a full-time basis or as an occasional side hustle, you may be more focused on developing the goods or services you provide, and less on the tax end of things. In fact, you may even question whether you have any obligation to pay taxes at all.

In this blog post, we’ll discuss taxes for freelancers and gig workers, including when you have to file, and how to make the process manageable.

Understand When You Need to Report Income

Depending on the nature or size of your freelance gig, you may not even think of it as a business. It may feel small and informal, but if your income is above a certain threshold, the IRS may have different thoughts.

Let’s say you bake a few dozen muffins every other week that you sell to your friend for her coffee shop. She pays you for them, but the whole arrangement feels very informal—more like a compensated favor than a gig or a job. Still, if you have more than $400 in income from such work in a year, it must be reported to the IRS.

$400 is a pretty low threshold; you might earn that from a single gig or temporary job. Even if you are paid in cash, even if you don’t have a written contract with a client or customer, even if you don’t receive a Form 1099: it still counts, and you are obligated to report it.

Keep Good Records of Income and Expenses

Having a regular job has its downsides, but one of the advantages is that someone else is keeping a record of your income, and at the end of the tax year, you receive a Form W-2 declaring the amount of that income.

As a gig worker or freelancer, you probably don’t have the luxury of someone else tracking your income. That income may be from multiple sources, and may come to you via cash, check or credit card. Your life will be a lot easier at tax time if you’ve kept good records of what income has come in, and from where.

Remember to keep track of your expenses, too. While not all expenses will be deductible on your income tax return, some, such as home office expenses, may be. Maintaining good records of your deductible expenses can lower your tax bill, so it’s worth your time.

Be Aware of Estimated Tax Deadlines (and Whether They Apply to You)

Freelance tax payments happen more than once a year. Self-employed gig workers and freelancers need to make estimated tax payments on a quarterly basis. Even if you think you will be due a refund when you file your income tax return in April, you may still need to estimate and make those payments four times a year. If you fail to make your quarterly payments, you could end up owing interest and penalties. Estimated tax payments are not just for income tax, but for other taxes such as self-employment tax.

W-2 employees pay estimated tax, too; we just don’t usually think of it that way. It’s the federal withholding on every paycheck. If you have a regular paid job in addition to your gig or freelance work, you may be able to simply increase the withholding from your paycheck to cover any estimated income tax you may owe. Otherwise, make sure you’re aware of relevant tax deadlines.

Consider Setting Up a Business Entity

Few things are more gratifying than a hobby or side hustle that turns into a thriving business. If your freelance or gig work is taking off, you may want to consider establishing a business entity. While operating a sole proprietorship (unincorporated business in your sole name) is easiest, there are advantages to setting up a business entity. One benefit is asset protection; having a business entity can shield your personal assets in the event of liability. Another benefit is tax-related; certain business entities, like an S corporation, can protect some of the business’s profits from employment taxes.

Save for Retirement

Saving for retirement might not sound like something you can afford to do as a gig worker or a freelancer. And where would you even begin, if you don’t have the option of an employer-sponsored retirement account like a 401(k)?

The good news is that you do have options, and saving for retirement can not only provide you with some security for the future, but tax benefits for today. As a self-employed person, you can open and contribute to a SEP-IRA. You can still make pretax contributions to a SEP-IRA even if you do have another job and another employer-sponsored plan.

The rules for establishing a SEP (which stands for “Simplified Employee Pension”) can be complicated, so it is worth talking to a tax professional to make sure you are following the rules and requirements to get the benefit you’re looking for.

The Bottom Line

Letting a professional handle your taxes can not only save you stress, it can leave you time to focus on your own gig.

To get more tax tips for freelancers, or learn how to pay taxes as a freelancer, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.