Understanding the Gig Economy — Tax Considerations

The gig economy, also known as the sharing economy, is a more flexible model of the economy. It depends completely on self-employers and freelancers. This economy has given a chance to earn money to a lot of people who are unable to do full-time jobs, and this has also contributed to changing the whole economy. The gig economy has different rules and regulations regarding taxes than the normal one, so knowing them is important.

This blog will let you know what you need to know about taxes in the gig economy, as well as all the information about tax considerations in the gig economy. If you are considering doing freelance work as a part-time job or a side hustle, seek advice from the experts in any small business accounting Denver offers. 

Understand The Difference Between Independent Contractor And Employee

There is a significant difference in tax obligations for an employee and an independent contractor. Knowing that difference is very crucial if you want to survive in the gig economy. 

Gig workers are usually considered independent contractors, which makes them responsible for paying their taxes, including Social Security and Medicare. 

Freelancers receive Form 1099 NEC from the platforms that pay them more than 0 annually. These forms are necessary for a freelancer, and they have to report these forms and their earnings on their tax returns.

Full-time employees get regular paychecks from their employers, excluding taxes like Social Security and Medicare. Their employers have to pay those taxes from their salary beforehand. Their employers also pay the unemployment insurance on their behalf, unlike the freelancers who need to pay these taxes by themselves as they are independent contractors.

You Need To Know Which Taxes In This Economy Is Deductible?

One of the major advantages of the gig economy is its deductible expenses, which are more than the ones in employment. These deductible taxes are the best thing about independent contracting; they prevent you from paying a lot of money in taxes.

If the freelancer is working from home, then he can deduct the taxes of the part in his house that is used for the office. They include mortgage, rent, and home maintenance. They should maintain proper records of the bills and taxes. Travel expenses, such as those for the client’s house or office, can be included in the deductible taxes. One should keep a complete and proper record of the distance and mileage of the car and the amount of fuel and maintenance used in the traveling.

The cost of supplies and equipment a freelancer needs for his job is also deductible; They usually include the cost of computers, software, printers, etc. The freelancer should keep a separate record of the office supplies and home supplies so that the tax on the supplies can be deducted properly.

Personal expenses and expenses which are in no way related to a freelancer’s work are not deductible. An independent contractor should keep a separate record of the expenses for his office use and his expenses so that the records do not get mixed while filing it; he might get in trouble in case this happens.

Understand The Self-Employment Taxes

An independent contractor has to consider self-employment tax as the priority. As it is the most important tax, he needs to pay while doing any kind of job. Self-employment tax includes both the Social Security tax and Medicare tax. As of 2024,  The Self-employment tax comprises 15.3% of your income, 12.4% is for Social Security, and 2.9% is for Medicare.

Consult An Accountant Soon!

A professional will help you very much in taxation if you are considering freelancing work. He will also help you record your deductible taxes so you do not get them mixed up and get in trouble. A professional will also help you calculate the Self-Employment tax properly.