Filing for a tax return is mandated for those with net earnings from self-employment of $400 or more, regardless of whether it is from a side job, part-time or temporary job, as written on the IRS website.
Typically, the employer is responsible for withholding income taxes from payment, and the worker will receive a Form W-2. This rule applies to those side gigs that involve working as a company employee.
In contrast, for freelancers or independent contractors with no taxes withheld from payment, the company that pays a total of $600 per year or more is supposed to send a Form 1099-NEC. If the company pays through a third-party payment processor, like PayPal, the payment processor should send a Form 1099-K. However, this only applies if your total income in 2022 exceeds $600, regardless of the number of transactions.
Freelancers are advised to keep track of all their earnings from their side gigs to ensure an accurate return during the tax season. (Photo: Getty)
GOBankingrates advises freelancers to keep a spreadsheet, ledger, or record system to track all side gig payments they have received throughout the tax year. Maintaining the records of all the side gig income earned during the tax year is crucial to make an accurate return during the tax season.
The IRS also gave the following guidelines:
- Gig workers may be required to make quarterly estimated tax payments to help pay their income taxes, including self-employment tax, throughout the year. This rule applies not only to federal income taxes but also to state income taxes in most states.
- Self-employed gig workers must pay all Social Security and Medicare taxes on their earnings from gig work.
- Workers in the gig economy have two options for paying their income taxes:
- If they have another job as an employee, they must submit a new Form W-4 to their employer to have more income taxes withheld from their paycheck.
- Make estimated tax payments quarterly.
Freelancers can also use the worker classification page on IRS.gov to determine the classification. Depending on the tax limits and rules, you may be able to deduct business expenses as an independent contractor. As a result, it’s critical to keep track of your business’s income and expenses.
