What Self-Employed and Gig Workers Need to Know Before Filing Their Taxes
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Here's your Money Briefing for Tuesday, March 18th. I'm Julia Carpenter for The Wall Street Journal. Tax day is less than a month away. And if you're self-employed or even if you just pick up a bit of gig work here and there, you'll have to think about it a little differently. Any work you do as a freelancer or as an independent contractor, that could be consulting work, giving piano lessons, or even selling stuff online that all can count as gig work that's taxable. So what do you need to tell the IRS about your side hustle?

Our reporter, Ashleya Ebeling, digs into common mistakes around business deductions, estimated taxes, and a lot more. That's after the break. ♪

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If you've sold something online, done a bit of consulting, or otherwise made money from a side hustle, your tax situation might not be as simple as you think. Wall Street Journal reporter Ashleya Ebeling joins me to talk it through. Okay, Ashleya, let's start with the basics. First, what does the IRS consider to be gig work? And secondly, what kind of gig work income is taxable? Most income is taxable. Most income is taxable.

Any work you do as a freelancer or as an independent contractor, that could be consulting work, giving piano lessons, or even selling stuff online that all can count as gig work that's taxable. So it could be a side gig if you have a nine-to-five job, or it could just be you have one gig or multiple gigs, and that's your income stream. A whole myriad of gigs. Exactly. So.

So we know that when a worker has a nine to five full time job, their employer typically takes out taxes for them. But self-employed people have to do that on their own. Where do you see people tripping up here, making mistakes? The very first thing is not understanding that they have income that's taxable and also how you're paid. It's income no matter how you're paid, whether it's in cash or through a payment app or with an old fashioned check.

The tax system is pay-as-you-go. So taxpayers with self-employment income often, they don't know that they have to pay in quarterly estimated taxes. So throughout the year, you have to be paying into the system or you might get hit with penalties for underpaying. And gig workers are taxed on profits rather than gross revenue. And so that means understanding business deductions is super important.

I wonder, from your perspective, what kinds of expenses would you recommend a self-employed taxpayer pay extra close attention to? The first big one, maybe you can take the home office deduction, and that's if you use part of your house exclusively for your gig job. And there's a simplified version based on the size of your office, up to 300 square feet, so you can get up to $1,500 off your taxes that way.

Other deductions you should look at would be business phone and Internet usage, vehicle mileage if you drive for your business, business meals can count. But the key thing is meticulous records are absolutely essential in case you do get audited.

So you're reporting on a Schedule C, probably, your business income. And then you're likely able to get this extra 20% deduction just for being a self-employed person. I can totally envision someone grabbing this with both hands and becoming a total whiz at deductions,

What's the benefit to that? So you lower your tax bill. And especially the first year when you start your business, when you might be investing in a computer or say you're a photographer, you'd be investing in camera equipment. You might have enough deductions to offset nearly all of your income. Your story makes mention of one tax form in particular, the 1099-K.

Why is it important that gig workers understand this form and its significance? That is super important. Like a nine to five worker gets a W-2 form at tax season, and that outlines their wages that would go to the worker and the IRS. So along the same lines, a self-employed worker would get a 1099K, and that could

could be from transactions from online payers like PayPal, or it could be from eBay if you're selling stuff online. The threshold for these forms to go out for last tax year, the current tax season, is when transactions for goods and services exceed $5,000. It used to be $20,000. So way more people have gotten those forms in January, and they're dealing with them on their taxes this year.

So if I get a 1099K, is it always taxable?

So that's very tricky and very important. The 1099K is going to show the gross amount. So that's why it's all important that you would report that so it matches with the IRS documents. But you also put in your expenses. And there's another exception for people who sell personal stuff on eBay, almost like a garage sale, and you sell it at a loss. That does not count as income. So they put a special line in the tax code.

form this year if you have 1099K income that's just household goods. And that's if you sell at a loss, if you sell at a profit. If you sell at a profit, it still counts as income and you have to pay taxes on the gain. You gave a lot of great examples of different gig work and different ways that people could earn this income.

At what point, what's the number where they actually need to file taxes on it? I'm thinking about somebody who has sat plants occasionally and made $200 versus someone who did a consulting gig and made $3,000. So it's actually a very low threshold. You have to file a tax return if you've net earnings from self-employment of just $400. Okay. And that seems, oh my God, why should I have to do it? But there's the advantage when you're doing this, you're paying self-employment taxes into

That actually brings us to the last thing I wanted to ask you about, which is retirement. Because, of course, saving for retirement is going to look really different for the self-employed.

What options are available to them? And how does that come into play at tax time? So if you're just starting out, you might save in a traditional or Roth IRA. And the basic contribution limit for those is $7,000 a year. Self-employed individuals have even more access to these special retirement plans just for them. And they're called SEP IRAs and solo 401ks. And with those, they have much higher contribution limits. So someone who

has big earnings or is married to someone so then they have the wherewithal to save even more can save in those plans. That's WSJ reporter Ashleya Ebeling. And that's it for your Money Briefing. This episode was produced by Ariana Asparu with supervising producer Melanie Roy and deputy editor Chris Zinsley. I'm Julia Carpenter for The Wall Street Journal. Thanks for listening. ♪