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If this is your first year with a side gig, you might not be familiar with how to file your taxes. Even if you’ve handled your own taxes before as an employee, there are lots of different facets to filing as a self-employed worker.
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Your side gig might not necessarily feel like a “business” to you, particularly if you still work as a full- or part-time employee. However, in the eyes of the IRS, you’ll have to file your taxes as if you run your own company. But in many ways, this is a plus, as businesses get certain tax perks that are typically unavailable to salaried employees. Here’s a list of some things you’ll need to look out for if you’re filing taxes for your side gig.
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Pay Quarterly Estimated Taxes
When you’re a salaried employee, your employer typically deducts taxes from your paycheck and sends them directly to the IRS. If you’re working a side gig, you’ll be responsible for making those payments. The IRS specifies a quarterly timetable when you’ll have to submit your estimated taxes for the period. Those due dates are April 15, June 15, Sept. 15 and Jan. 15. Failure to make those payments on time will result in a penalty.
Related: These Are the Receipts To Keep for Doing Your Taxes
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Look For a 1099, Not a W-2
As a salaried employee, you’re likely used to getting a W-2 at the end of each year. However, if you’re filing taxes for a side gig, you should be looking for form 1099s from each of your clients. If you receive cumulative payments of $600 or more from any individual or business, you should receive a 1099-NEC, which replaced Form 1099-MISC in tax year 2020. This form outlines how much “non-employee compensation” you received during the year that you’ll have to report as income to the IRS.
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File Your Own 1099s
It’s possible that in the course of doing business in your side gig that you had to pay other professionals $600 or more for their services. In this instance, you yourself are also responsible for sending a Form 1099-NEC to any such recipients. You can typically deduct these payments as expenses, but you’ll have to file Form 1099-NEC to be able to document those payments.
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Great News — Deductions!
Probably the best news for freelance and side gig workers is that you can deduct a large number of business expenses that you couldn’t as a salaried employee. For example, if in the course of your side work you pay for insurance, including life or health insurance, that’s a qualifying deduction. Similarly, any expenses for supplies, fuel, internet or other costs that advance the cause of your business may qualify as a deduction. This is an area where you should seriously consider consulting with a professional tax advisor.
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Not so Great News — Social Security Taxes
One of the biggest negatives of running your own business, even as a side gig, is when it comes to Social Security taxes. In your salaried job, you are responsible for the employee’s portion of Social Security taxes, which comes to 7.65% of your wages (up to an annual income cap). However, when you have your own side gig, you are technically both an employer and an employee, meaning you have to pay both portions, totaling 15.3% of your applicable income.
Read: What To Do When You Can’t Pay Your Tax Bill
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Take Your 20% Qualified Business Deduction
The Tax Cuts and Jobs Act of 2018 included a great benefit for many businesses, including most self-employed side gig workers. The Act provided for a 20% deduction of most qualified business income. In the simplest terms, if you pull in $10,000 from your side gig, you may qualify to deduct $2,000 of that from your income, thereby saving you potentially a very pretty penny in taxes.
Related: Take Advantage of These 15 Commonly Missed Tax Deductions
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Software Can Make Everything Easier
Even if you think that your taxes as a gig worker are relatively simple, working with software is almost always a good choice. For starters, many providers offer free versions of tax software, so there’s no reason not to at least give it a try. But even if there’s a cost, tax software can help make sure that you both pay the taxes you owe and don’t overlook any deductions that are available to you. This is particularly important if this is your first time filing taxes as a gig worker, as you may be unfamiliar with how to file correctly.
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Don’t Be Afraid To Claim the Home Office Deduction
A lot has been written about how the home office deduction is an audit flag for the IRS. But even if this does raise a red flag, you should never be afraid to claim deductions that you are legally entitled to. The home office deduction does have a strict set of rules. For example, you must only use a portion of your home that is 100% dedicated to your work life in order to claim it. However, if you legitimately do use a portion of your home as an office, take your legally allowed deductions. Just be sure to keep proper documentation in case the IRS does make an inquiry.
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Some Clients May Not Send You a 1099
Some of the earnings you receive as a gig worker may come via a payment processing service like PayPal or Venmo. Sometimes, institutions or individuals paying you this way may not bother with filing a 1099. However, whether or not you receive a 1099, you’re still legally responsible for paying income tax on those earnings. Be sure to document your income from any and every source and report it to the IRS, even if you don’t get a 1099.
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You May Not Receive a 1099 If You Earn Under $600
Legally, individuals and institutions aren’t required to issue a 1099 if they pay less than $600 to any particular recipient. Yet, the IRS still requires Americans to report income from all sources, regardless of the amount. Just like you might not get a 1099 if you receive income over Venmo or PayPal, you also won’t likely get a 1099 if you earn a small amount from a specific entity. But the law states that you’re still responsible for income tax on even these small amounts.
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This article originally appeared on GOBankingRates.com: Everything You Need To Know for Tax Season If This Is Your First Year With a Side Gig