In case you were wondering if your side gig income is taxable, the IRS sent out a quick reminder this week that it is.
In a June 27 memo on its website, the IRS said “income from work in the gig economy is taxable whether or not an individual receives information returns.” If your side job involves working as an employee at a company, your employer typically withholds taxes from your pay, including FICA taxes to cover Social Security and Medicare. In this case, you will receive a W-2 form.
See: 22 side gigs that can make you richer than a full-time job
Plus: 8 remote jobs that pay at least $20 an hour
If you are a freelancer or independent contractor with no tax deductions from your pay, companies that compensate you for your gig work are supposed to send you a Form 1099-K. However, this only applies if the total revenue you received from a specific business exceeded $600 in 2022, regardless of the total number of transactions.
Due to the rules, you may not receive a Form 1099-K or any other information return for 2022. This means that it is up to you to track all of your secondary gig income during the tax year. so that you can file an accurate return the following tax time. The best strategy is to keep a spreadsheet or other record and record all of the side payments you receive throughout the tax year.
To help you stay on top of your income and tax obligations, the IRS offers the following tips:
- Gig workers may be required to make estimated quarterly tax payments to help pay their income taxes throughout the year, including self-employment tax. This applies not only to federal income taxes, but also to state income taxes in most states. The IRS has a Withholding Tax Estimator on its website to help you determine the amount to withhold.
- Self-employed individuals must pay all of their Social Security and Medicare taxes on their income from gig activity.
- Gig economy workers who are not considered employees have two ways to cover their income taxes:
- Submit a new W-4 form to their employer to have more taxes withheld from their wages if they have another job as an employee.
- Make quarterly estimated tax payments.
Small Business Spotlight 2022: Nominate your favorite small business by July 25
It is important to ensure that you are properly classified as a taxpayer, such as an employee or an independent contractor. You can use the classification of workers page on IRS.gov to see how you should be classified.
If you are an independent contractor, you may be able to deduct business expenses, depending on tax limits and rules. It is therefore also important to keep records of your business expenses as well as your income.
More from GOBankingRates