Side gig income can be a great way to boost cash flow, pay down debt or build savings. But as a gig worker, you may be unaware that the money you make is fully taxable, the same as a regular paycheck.
The problem is that unlike with income you earn from an employer, no taxes are automatically withheld. This means that unless you’re on top of things, you could be in for a nasty surprise at tax time, and that’s a situation you definitely want to avoid.
With that in mind, here’s how side gig taxes really work.
Your Side Gig Income Is Usually Self-Employment Income
Most freelance, contract and gig work is treated as self-employment income, per the Internal Revenue Service (IRS). If you earn at least $400 in net profit for the year, you must report it on Schedule C with your Form 1040 and pay self-employment tax in addition to income tax.
Your taxable amount is not your gross revenue, as explained in the IRS Instructions for Schedule C. You’re taxed on net profit, meaning income minus ordinary and necessary business expenses such as supplies, mileage, software subscriptions, advertising and home office costs when applicable.
This is one of the many reasons why good record keeping matters. Every legitimate expense reduces both your income tax and your self-employment tax.
Find Out: What Are Progressive Taxes and How Do They Work?
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How 1099 Income Is Calculated and Reported
Most side gig workers receive one or more Form 1099-NEC or 1099-K forms showing how much they were paid during the year. These forms report gross payments, not profit. That means the IRS sees the full amount before any expenses are deducted.
For example, if a platform pays you $22,000 over the year and sends you a 1099-NEC for that amount, that entire $22,000 is reported to the IRS. On your tax return, you then subtract your business expenses on Schedule C to calculate your true taxable profit. If you had $7,000 in qualifying expenses, your net taxable income would be $15,000, not $22,000.
It’s important to understand that you’re responsible for reporting all income even if you don’t receive a 1099 or if the amount on the form is incorrect. The 1099 simply helps the IRS match reported income, but your own records ultimately determine your taxable profit.
If you receive multiple 1099s from different platforms or clients, you combine all the income on one Schedule C and subtract total expenses to arrive at net profit.
The Two Taxes You’ll Pay
When you earn money from a side job, you’ll be liable for both income tax and self-employment tax.
Income Tax
Your net side gig profit is taxable as ordinary income, same as with any wage or salary you earn. In fact, most gig workers also earn traditional income, with side work simply bringing in additional income. Ultimately, all of your taxable income must be added together to determine how much you pay in overall taxes.
Self-Employment Tax
What surprises many gig workers is that in addition to ordinary income tax, they must pay self-employment tax. In reality, employed workers already pay part of this tax, which is used to cover Social Security and Medicare. But when you work for an employer, these taxes are split between you and the company, with each party paying one-half of what’s owed. Unfortunately, when you’re self-employed — as you are if you do gig work — you must pay both halves yourself.
The current self-employment tax rate is 15.3%. The IRS does allow you to deduct half of that tax as an adjustment to income, which slightly reduces your overall tax bill.
A Quick Example
Suppose you earn $18,000 from a side gig throughout the course of a year and deduct $3,000 in legitimate expenses. Your net profit is $15,000.
On a $15,000 net profit, self-employment tax would be about $2,295. If you’re in the 22% federal tax bracket, income tax could add up to $3,300. Your total federal taxes could approach $5,600, or around 37% of your profit before any credits or adjustments.
Of course, real-world results can vary dramatically based on a number of factors, such as your filing status, deductions and state taxes.
When You Need To Make Estimated Tax Payments
Another fly in the ointment for gig workers is that they may be required to make quarterly estimated tax payments. Specifically, the IRS generally requires them if you expect to owe at least $1,000 in federal tax for the year after withholding and credits. These payments are usually due in April, June, September and January and are calculated using Form 1040-ES.
Pro tip: Many freelancers set aside 25% to 30% of their net income in a separate savings account to cover taxes and make quarterly payments.
The Bottom Line
Side gig income can mean both opportunity and income, but it can also create a tax liability. Most workers should expect to pay both income tax and self-employment tax on net profits. Understanding how 1099 income is reported, tracking expenses accurately and planning for estimated payments can help keep tax season predictable instead of painful.
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This article originally appeared on GOBankingRates.com: Here’s How Much You’ll Owe in Taxes on Your Side Gig Income
