Gig workers pay taxes differently than traditional long-term employees. The term ‘gig worker’ includes independent contractors, freelancers, contract workers, on-call workers, temporary workers, and more. Gig workers, or what the IRS terms ‘independent contractors’, are considered self-employed individuals for tax purposes.
Who is a gig worker?
The general rule to know if an individual is a gig worker is that the payer/employer has the right to control or direct only the result of the work, and not what will be done and how it will be done. In other words, a gig worker chooses how and when to complete the work while the payer/employer simply determines the outcome of the work.
Doctors, lawyers, accountants, subcontractors, etc., who work independently and not for a company, or a firm are considered gig workers/independent contractors as well. According to the IRS, “In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.”
If still in doubt, a worker or a business may use Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and send it to the IRS to know their employment tax status from the IRS.
Self-employment tax
Both gig workers and businesses hiring them need to treat independent contractors differently than employees for tax purposes. While a traditional employee will have taxes withheld from his/her paycheck by the employer, an independent contractor must pay self-employment taxes.
Self-employment tax refers to Social Security and Medicare tax. A self-employed individual might also need to pay other taxes, but those are not included in self-employment tax, just like employees get Social Security and Medicare taxes withheld from their paycheck by their employer. Similarly, the self-employed, such as gig workers, need to pay Social Security and Medicare taxes through self-employment tax.
To calculate the self-employment tax, gig workers can use Form 1040. Those who are 65 years old or older can use Form 1040-SR, an alternative to Form 1040.
Income threshold for paying self-employment tax
Gig workers are required to pay self-employment tax only if their net earnings from self-employment were $400 or more. This excludes church employee income. In the case of a church employee, the income threshold for paying self-employment tax is $108.28 or more.
Self-employment tax rate
The self-employment tax rate is 15.3% for 2021-2022. It divides into social security tax of 12.4% and a Medicare tax of 2.9% charged on net earnings. Additionally, a Medicare tax rate of 0.9 % may apply to wages, compensation, and self-employment income if it is above a certain threshold and was received in taxable years after Dec. 31, 2012.
Self-employment tax deductions
There are certain tax deductions that gig workers can claim on their return to reduce their tax liability. These include:
- They can deduct the employer-equivalent portion of their self-employment tax when calculating their adjusted gross income. It affects their income tax, but not their self-employment tax.
- They can claim the Earned Income Tax Credit (EITC) if eligible by filing Form 1040 or Form 1040-SR Schedule C.
- Under the Small Business Jobs Act, the self-employed are allowed a deduction for the cost of health insurance. This deduction can be used when calculating net earnings from self-employment.
How to pay self-employment tax
To pay self-employment tax, the self-employed need to have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). The IRS issues ITIN to nonresidents or resident aliens, or to individuals who do not have a SSN or are not eligible for one. To obtain an SSN, gig workers can use Form SS-5, Application for Social Security Card, and for an ITIN they can use Form W-7, Application for IRS Individual Taxpayer Identification Number.
