Tax Implications for Freelancers & Gig Economy Workers in 2024
According to US taxation laws, a crucial element of navigating the freelancing and gig economy landscape involves tax implications for freelancers. Discover how to optimize your income effectively and uphold financial stability in this dynamic work environment.
In this blog, you will learn who freelancers and gig workers are and what freelance tax implications are important.
Table of Contents
- What Does Self-Employed Mean?
- Who Is a Freelancer?
- Who is a Gig Economy Worker?
- How to Do Taxes as A Freelancer?
- Tax Implications for Gig Economy Workers
- How Much Tax Should a Gig Worker Pay?
- Tax for Gig Workers with Multiple Gigs
- How to Reduce Your Tax Bill as a Gig Worker?
- Tax Implications for Gig Workers Earning on Foreign Soil
- Tips for American Gig Workers Residing Abroad
- What deductions can Freelancers take?
- What are the Quarterly Tax Dates for 2024?
- Frequently Asked Questions
- Conclusion
As a self-employed individual, you can operate in diverse fields, spanning professional services such as consulting or graphic design to trades like plumbing or carpentry. Your work may involve long-term client relationships, short-term projects, or a combination of both.
Freelancing also falls in the sub-domain of self-employed work. As a freelancer, you are an independent professional offering services to multiple clients on a project-to-project basis. Your expertise is usually applied in creative, knowledge-based, or specialized fields like writing, graphic design, web development, photography, and marketing.
With a specific skill set, you may concurrently work with various clients, providing expertise to meet their project requirements
As a gig worker, you fall under a broader category that includes self-employed individuals and freelancers. As a gig worker, you engage in short-term, temporary, or on-demand work, commonly known as “gigs.”
These gigs can be projects, tasks, or services, often facilitated through online platforms or apps. As a gig worker, you may encompass freelancers, independent contractors, on-call workers, or those involved in the sharing economy, such as rideshare or food delivery drivers. Your work schedule may be less predictable, and income can come from various sources.
In 2024, the self-employment tax rate is 15.3%, comprising 12.4% for Social Security (covering old-age, survivors, and disability insurance) and 2.9% for Medicare (supporting hospital insurance).
For the tax year 2023, the initial $160,200 of your combined wages, tips, and net earnings are subject to any combination of the Social Security part of self-employment tax, Social Security tax.
All your combined wages, tips, and net earnings for the current year are subject to any combination of the 2.9% Medicare part of the self-employment tax, Social Security tax.
Suppose your wages and tips are subject to either Social Security tax, totaling at least $160,200. In that case, you are exempt from paying the 12.4% Social Security part of the SE tax on any of your net earnings. However, you must still pay the 2.9% Medicare part of the SE tax tax on all your net earnings.
Note that you become liable for an additional 0.9% Medicare Tax if your wages, compensation, or self-employment income, combined with your spouse’s income (in case of a joint return), exceed the threshold amount for your tax filing status.
| Filing Status | Threshold Amount |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separate | $250,000 |
| Single | $125,000 |
| Head of household (with qualifying person) | $200,000 |
| Qualifying surviving spouse with dependent child | $200,000 |
| Filing Status |
|---|
| Married filing jointly |
| Married filing separate |
| Single |
| Head of household (with qualifying person) |
| Qualifying surviving spouse with dependent child |
| Threshold Amount |
|---|
| $250,000 |
| $250,000 |
| $125,000 |
| $200,000 |
| $200,000 |
If you choose a tax year different from the calendar year, use the tax rate and maximum earnings limit effective at the start of your tax year. Even if there are changes in the tax rate or maximum earnings limit during your tax year, consistently using the same rate and limit throughout that period is essential.
Tax Implications for Gig Economy Workers
Gig work refers to specific activities undertaken to earn income, typically facilitated through digital platforms such as apps or websites. Examples include:
- Driving a car for booked rides or deliveries
- Renting out property or a portion of it
- Running errands or completing tasks
- Selling goods online
- Renting out equipment
- Offering creative or professional services
- Engaging in other temporary, on-demand, or freelance work
A gig economy is a market system characterized by the prevalence of temporary positions where companies enlist independent workers for short-term commitments. The term “gig” is informal slang referring to a job that has a defined and limited duration.
One significant advantage of the gig economy is that, as a freelancer, you have opportunities to earn income through jobs that offer flexibility and remote work options. This often allows you to prioritize your work’s quality over traditional credentials.
Per the Internal Revenue Service (IRS) guidelines, it is necessary to file a tax return if your net earnings from gig work amount to $400 or more, regardless of whether it is a side job, part-time endeavor, or temporary engagement.
Tax obligations apply to the income derived from gig work. If you engage in gig work as an employee, your employer is responsible for withholding taxes from your paycheck. However, if you operate as an independent contractor, you may be required to make estimated tax payments.
If you are uncertain about your classification as an employee or independent contractor, seek clarification from your employer or verify your worker status with a Certified Tax Planner or freelance specialist tax accountant in Dallas.
You must immediately report your income to the IRS if you are a gig worker with multiple gigs or jobs.
For example, you are a gig worker working as an Uber driver and part-time online content marketer. If you have received payment of $600 or more from working on any of these gigs during 2023, you will be liable to pay income tax on this amount in the 2024 tax season.
In such cases, the entity or individual who made the payment is typically obligated to furnish you with Form 1099-NEC, specifically for nonemployee compensation. Additionally, if you receive payments through online payment services like PayPal, there’s a possibility of receiving Form 1099-K.
It is important to note that payers also submit these forms to the IRS to report the income they have received. Payers must dispatch 1099 forms by January 31, indicating the dollar amount they earned and any withholdings from their payments, although withholding on 1099 forms is not prevalent.
If you do not receive this form, it remains your responsibility to report your earnings.
Failure to include nonemployee compensation reported on a 1099 form in your tax returnmay lead to penalties. First, if the IRS deems your tax liability substantially underreported, they may impose an accuracy-related penalty amounting to 20% of the tax underpayment.
The IRS considers the understatement substantial if the underreported tax liability exceeds the larger of 10% of the correct tax or $5,000 for individuals.
For instance, neglecting to include $10,000 of your nonemployee compensation on your tax return would mean understating your taxable income by $10,000.
For example, if you are a single filer in the 22% income tax bracket, the penalty would be $440.
The Calculation: $10,000 x 22% tax bracket x 20% accuracy-related penalty $440.
How to Reduce Your Tax Bill as a Gig Worker?
Deducting business expenses can effectively reduce your taxable income. This will help lower your overall income tax as a gig worker. As a gig economy worker, you gain the advantage of deducting specific expenses from your self-employment income, a benefit not available to W-2 employees.
For instance, if you work as a rideshare driver, meticulous tracking of your car mileage during ridesharing is important. This allows you to deduct a portion of it at the per-mile rate during tax time. This deduction encompasses maintenance, gas, and insurance costs associated with your vehicle.
- Ordinary expenses – common and widely accepted within your business.
- Necessary expenses – deemed helpful and essential for your business operations.
Let us suppose you are a ski teacher. In this case, you might consider your ski boots an “ordinary expense.”
However, if you are a landscaper, you can deduct the rent for a storage space utilized to house landscaping tools and equipment. Even though a storage space may not be obligatory for landscaping, it qualifies as a “necessary expense” because it contributes to your business’s functionality.
Some common deductible expenses related to your side gig include:
- Business mileage on your car
- Dues and subscriptions paid to business-related organizations
- Necessary tools and equipment
- Tuition for work-related education and training costs
Tax Implications for Gig Workers Earning on Foreign Soil
If you are an expat working as a gig economy worker aboard, tracking the earnings generated from your gigs is crucial. This applies to all, regardless of your work setting or duration, especially if the work is part-time or paid in cash.
According to the law, as an American expatriate engaged in gig work, you must report your earnings on your federal tax return. This reporting obligation is particularly relevant if your income falls into the following categories:
- Received in various forms, including cash, goods, virtual currency, property, etc.
- Generated from temporary, side gig, or part-time work
- Not documented on 1099-MISC, Form 1099-K, or any other income tax forms
Tips for American Gig Workers Residing Abroad
For a smooth tax filing process as a gig worker abroad, maintain your income records, invoices, and receipts throughout the year. Whether you collect them physically in a folder or track them digitally using online Excel sheets, record-keeping is crucial for filing your tax return.
Even if you don’t receive or are unaware of Form 1099 (which reports the total payments received from a person/entity or business during the year of service), keeping records of all income earned from gig work and sales is essential.
If you earned income as an independent contractor for gig work, you may need to pay taxes. It is advisable to check with a tax planner for expats to determine your tax obligations. To avoid penalties, pay the tax before the April 15 deadline.
Some businesses, whether based in the US or abroad, might submit forms to the IRS detailing the payments made to you. If they indeed follow this practice, it’s crucial that you receive copies of these forms by January 31 each year. Common forms include Form-W2, Form 1099-MISC, and Form 1099-K.
In cases where you don’t receive these forms, you can use sales receipts or invoices to report payments not documented on Forms 1099 or W-2 to the IRS.
If the prospect of managing physical tax forms feels overwhelming, consider consulting with a tax preparation and submission expert and opt for online tax filing to simplify the process.
What Deductions Can Freelancers Take?
Consider these standard deductions to optimize your tax savings as a freelancer:
- Home Office
- Health Insurance
- Continuing Education
- Car Expenses
- Retirement Savings
- Self-Employment Taxes
- Business Insurance
- Office Supplies
Deduct a portion of mortgage/rent, property taxes, utilities, and maintenance for your home office.
Deduct medical and dental premiums for your spouse, dependents, or children under 27.
Deduct any qualifying work-related education expenses.
Deduct your car’s mileage or actual car expenses for business purposes.
Deduct your contributions to a solo 401(k).
Deduct half of your self-employment tax as a business expense.
Deduct premiums you pay for business, employee accident, and health insurance.
Deduct your expenses for daily business supplies.
- Credit Card and Loan Interest
- Phone and Internet Costs
- Business Travel and Meals
- Start-up Costs
- Advertising
- Certain Memberships
- Qualified Business Income Deduction
Deduct the interest you pay on business-related purchases.
Deduct your entire internet and phone bill for a dedicated business line or a percentage for personal lines you use for business.
Deduct your travel expenses for legitimate business purposes.
Deduct up to $5,000 of your business start-up and organizational costs.
Deduct expenses related to your business advertising.
Deduct membership fees for your professional organizations.
Deduct a portion of business income on your taxes, depending on your total taxable incometaxable income and business type.
What are the Quarterly Tax Dates for 2024?
- First Quarter (Q1): April 15, 2024
- Second Quarter (Q2): June 17, 2024
- Third Quarter (Q3): September 16, 2024
- Fourth Quarter (Q4): January 15, 2025
It is crucial for self-employed individuals, freelancers, and others with income not subject to withholding to adhere to these quarterly estimated tax payments. This ensures compliance with tax obligations throughout the year.
Frequently Asked Questions
If you are a freelancer or gig economy worker in the USA, you are liable to pay a 15.3% income tax on your income.
A self-employed worker initiates their own projects; a freelancer typically responds to client requests. Freelancers commonly work independently, choosing their hours and taking on various jobs for different clients. On the other hand, the term “self-employed” is frequently linked with business owners.
Gig work encompasses various roles, including freelance jobs. The defining factor that places a job within the gig economy is its structure – typically temporary or part-time. However, this doesn’t imply a restriction to just one gig; individuals often engage in multiple gigs simultaneously.
