Tax Responsibilities for Gig Workers

Independent contractors and gig workers are part of a growing segment of the economy. AAFCPAs reminds clients who have turned to independent contract work this year that it is critical to understand the income tax consequences.

To start, independent contractors are typically considered self-employed. As a result, and because an employer is not withholding money from your paycheck to cover your tax obligations, you are responsible for making federal income tax payments. Depending on where you live, you may also have to pay state income tax.

Quarterly tax payments

The U.S. income tax system is considered “pay as you go.” Self-employed individuals typically pay federal income tax four times during the year: generally, on April 15, June 15, and September 15 of the current year, and January 15 of the following year. (For 2020, the April 15 and June 15 deadlines were postponed to July 15 due to the pandemic. It is possible other deadlines could be postponed as well.)

If you do not pay enough over these four estimated tax installments to cover the required amount for the year, you may be subject to penalties. To minimize the risk of penalties, you must generally pay either 90% of the tax you will owe for the current year or 100% of the amount you paid the previous year (110% of your previous year’s tax if your adjusted gross income was more than $150,000 or, if married filing separately, more than $75,000).

The 1099

You may have encountered the term “the 1099 economy” or been called a “1099 worker.” This is because, as a self-employed person, you will not get a W-2 from an employer. You may, however, receive a Form 1099 from any client or customer that paid you at least $600 throughout the year. The client sends the same form to the IRS, thus, AAFCPAs advises clients to monitor the 1099s you receive and verify the amounts match your records.

If a client uses a third-party payment system, you might receive a Form 1099-K. Even if you did not earn enough from a client to receive a 1099, or you are not sent a 1099-K, you are still responsible for reporting the income you were paid. Keep in mind that typically you are taxed on income when received, not when you send a request for payment.

Expense deductions

By definition, gig workers are self-employed. So, your income taxes are based on the profits left after you deduct business-related expenses from your revenue.

Expenses can include payment processing fees, your investment in office equipment and specific costs required to provide your service. If you use a portion of your home exclusively for workspace, you might be able to claim a home office deduction.

Good record keeping

AAFCPAs advises clients to keep accurate, timely records of your revenue and expenses so you pay the income taxes you owe, but no more. You also likely will have self-employment tax obligations (such as Medicare and Social Security taxes). AAFCPAs helps clients implement good record keeping systems, file taxes, and stay updated on new developments in the gig economy.

If you have questions please contact David McManus, CPA, CGMA at 774.512.4014,; or you AAFCPAs Partner.

About the Author

David McManus CPA
Dave leads AAFCPAs’ Cannabis Business Practice, providing highly coveted tax, entity structure, and business advisory solutions.  Dave has been deeply immersed in understanding the complex financial and operational nuances of the cannabis industry since 2012. He advises multi-state operators, recreational and medical retailers, cultivators, product manufacturers, and investors. He proactively advises clients on risks, opportunities, and tax implications related to market entry, accounting methods, capital structure, debt financing, R&D, M&A, and goodwill impairment. He has led industry training sessions on interpreting and implementing new federal and state marijuana statutes, including compliance with 280E. Dave maintains a strong network of cannabis industry investors, attorneys, bankers, employee compensation and benefits providers, realtors, risk managers, and insurance agents, and he leverages these resources as appropriate to help clients achieve success.