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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Your "Gig" Comes with Financial and Tax Responsibilities

A few weeks back, I wrote about the importance of identifying whether a worker/service provider was an employee or independent contractor. That article was geared more toward the business receiving the services, i.e., the potential employer. 

But what if you are on the other side? What if you are the service provider and find yourself as the independent contractor, maybe even what has come to be termed a "gig" worker? This is an important question. 

Prior to the COVID-19 pandemic, the "gig" or "sharing economy" was already growing rapidly. As people lost jobs or had their hours scaled back as a result of the pandemic, this trend just accelerated, as people looked for ways to supplement lost income. Even as jobs are opening back up, many are staying put in their gigs, enjoying the freedom, flexibility and control it gives them over their lives and livelihood.

But with this comes responsibilities. Especially if you are new at the game, it is important that you understand the tax and other obligations you have. 

For example, unlike an employee, gig workers and other independent contractors are not covered by minimum wage laws or other protections under most state and federal labor laws. They are also not covered by state or federal unemployment programs. Further, fringe benefits, such as an employer's group health insurance plan are not available to an independent worker. You are on your own for those, as well as taxes (including Social Security and Medicare, discussed below) and retirement savings.

Also, many people have the idea, falsely, that just because they are making money from a side job or won't receive a W-2 for their services, that the income they earn isn't taxable. Nothing could be further from the truth. The tax code explicitly states that any and all income, from whatever source, is taxable unless exempted by the code.

One of the responsibilities you have, and just a wise practice in general, if you are an independent worker is to keep good records that track your income and the expenses you incur in generating that income. I can't emphasize this enough. Your business expenses can reduce your income subject to tax, and without good records, if the IRS or state tax agency audits you, you could lose the benefit of deducting those expenses you can't substantiate. 

For example, if you use your vehicle for business purposes, keep a log of the business miles you drive showing the date, reason and number of miles driven. There are apps such as MileIQ that can help reduce the burden of this greatly. Also, keep receipts for business related purchases are also a must.

One idea I highly recommend is to establish a bank account through which only business-related income and expenses are accounted. Having it all in one place will be very convenient come tax time. Plus, by not mixing business and personal expenses in one account, the IRS is less likely to go snooping around as much looking for "personal" expenses that might be incorrectly deducted. 

As far as taxes go, you not only could be subject to state and local income taxes on the net amount of what you earn, but also will be liable for what is known as Self-employment (SE) tax. This is typically one of the big surprises for those new to the gig game. 

Essentially, SE tax is Social Security/Medicare (SSA) tax under a different name. When you are an employee, the employer pays half of the SSA tax, while the other half is withheld from the employee's pay. When you are self-employed, as gig workers and independent contractors are, you owe the whole amount, not just half. The SE tax is calculated and paid with your regular income tax return each year. 

Also, since you have no tax withholding from your earnings, you should consider paying quarterly estimated tax payments. Doing so will help reduce or eliminate a penalty that can be imposed for underpayment of estimated taxes. The due dates for estimated tax payments for a particular year currently are April 15, June 15, September 15 of the current year, as well as, January 15 of the following year.

A final point of information - you may receive a tax information form from those to whom you provide services, including online platforms with which you are affiliated (think Uber, Lyft, VRBO, etc.). This could be in the form of a 1099-NEC, 1099-MISC or 1099-K. Again, as explained above, don't think that just because some income you receive is NOT reported on such a form that you don't have to claim it as income. 

Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants, a full-service financial firm with offices around Arkansas, and winner of The Sun-Times Reader's Choice Award for Best Accountant

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