How Will Tax Reforms Affect Gig Economy Workers?

Did you know that 85% of gig workers in the US make less than $500 a month? Many of those gig workers are contributing significantly to the economy and yet still are having to pay ridiculous amounts of money in taxes. Oh, that’s you? We’ve been there, too. We get it.

Now, due to the fact that the gig economy is one of the economic sectors with the fastest and highest growth in today’s digital world, the stats above (and more, obviously) prompted the creation of a new fiscal policy by Congress. Yep, Congress has been talking specifically about you gig workers.

While the American Rescue Plan Act is definitely a step forward when it comes to making filing taxes as a freelancer much easier, it also helps to close the current tax gap. That’s great! But it’s only just a start. And, it will only just go into effect at the beginning of the 2022 tax year.

So, how will the new tax policies affect gig workers? Previously, companies that service this sector of the economy only had to report the income of gig workers who processed a large number of transactions and profits. However, under this new law, more employees will receive a 1099-K form, where they’ll list their gross income from all gig economy platforms (think Fiverr, PayPal, Upwork, etc.). Similarly, companies must also send this same form to the IRS (heads up, small business owners!).

If this sounds overwhelming then just take a deep breath. We’re here to work through this with you! It’s what we do here at Wealth Stack. Keep reading to figure out if you’re a gig economy worker and what that might mean for you in terms of taxes.

What is the Gig Economy?

Not sure what the concept of the gig economy even means? It’s defined as “the labor market or sector where temporary, self-employed, or independent contract work is the common factor.” In simpler terms, this means that permanent, full-time jobs aren’t a part of the gig economy.

It’s a little easier to understand if you break it down. The word “gig” comes from the music industry and refers to a job that lasts only for a specific period of time. In this type of economy, temporary and flexible jobs are normal.

What’s the point there? Well, if you’re a gig worker then you’ll know that it means you can access a variety of short, profitable jobs rather than having to stick to one thing. Plus, there’s the added benefit of flexibility and freedom (which we all love, don’t we?).

But despite its great benefits, there are glaring downsides due to the very fluid nature of transactions, contacts, and functions in this type of economy. If you’ve ever worked as a freelancer on Fiverr or have driven Uber then you’ll definitely understand what we’re saying.

Put plain and simple, up until now, the gig life is great for freedom and flexibility. What it’s not great for, though, is your future. A stable, salaried job offers you a fixed salary, health benefits, a retirement account, and more. Being a gig worker doesn’t. However, there are numerous pieces of legislature that are trying to change that.

Don’t have a freelance job yet? Check out our guide to the Best Freelance Jobs for Millennials in 2022.

What Are the Current Tax Laws for Gig Workers & Freelancers?

Work that’s carried out as part of the “gig economy” is considered self-employment work and taxed as self-employed work. This is different from working a “regular” job at a company. Those types of employees are referred to in the tax world as traditional W-2 workers.

As a self-employed worker, you don’t have your employer there for you to withhold money from your paycheck to pay taxes. Now, you’re responsible for doing that! On top of that, you’re also responsible for paying social security and medicare taxes.

What’s changing, though? Let’s go back to the American Rescue Plan Act mentioned above.

American Rescue Plan Act of 2021

The American Rescue Plan Act of 2021 significantly changes the reporting threshold related to Form 1099-K. Remember from above that this form deals with payment card transactions, and third-party platforms, yeah? Okay. So previously, you had to fill out the form if you had more than 200 transactions and $20,000 in recorded payments. 

Now, that cap is just $600 in aggregate payments. This means that if you earned over $600 in payments from anybody online, you’ll need to fill out that form and present it with your freelance tax returns starting in 2022.

California’s Proposition 22

Another current tax reform that applies to gig workers and freelancers in general is Proposition 22 in California (Prop 22. It's also known as the Contractor Applications-Based Driver and Labor Policies Initiative. It was approved in California in the general election in 2020.

Prop 22 is for application-based transportation drivers and delivery personnel. So, it's for those of you who drive for apps like Uber, DoorDash, or Lyft. The main win with this proposition has to do with wage and labor policies. Why? Gig and self-employed workers aren’t covered by state labor laws. This is why Prop 22 includes the following regulations:

  • Payments to drivers: This includes the additions of 30 cents per mile traveled
  • Work hours: There’s now a limit of 12 work hours during every 24-hour period
  • Healthcare subsidies: There is now a medical allowance offered each month, contributed by the company equal to 82% of the average California Covered premium, for drivers with an average weekly work of at least 25 hours during a calendar quarter (for drivers who average 15-25 hours per week, that percentage is lowered to 41% of the average CC premium)
  • Labor accident insurance: Includes company-provided insurance worth at least $ 1 million in medical expenses and loss of income, as a result of injuries sustained while performing work on the platform

There are a few more interesting bits and pieces about Prop 22 to understand if you’re a gig worker specifically in that sector of the economy. However, the overall good news is that California has paved the way for other states and the country as a whole to start viewing gig workers as important.

Just because you’re a freelancer doesn’t mean you don’t also deserve healthcare, retirement opportunities, and more. And, this all seems to be changing for the better.

One of the things that these types of laws are trying to do is to make things like retirement accounts more accessible for gig workers. Didn’t even consider that as a freelancer? Read through our guide on How Retirement Accounts Help Build Wealth.

How to Keep Records of Your Gig Income

Keeping a solid record of all the income you earn is going to be different from the record keeping that a W-2 worker might do. While in a traditional job, the company you work for will typically provide you with important financial documentation and tax forms. For those who are self-employed, you have to keep track of all of this yourself, including both monitoring your income from numerous different platforms and tracking your expenses.

To track your income, you will need to keep a record of the invoices for each client you worked with. For freelancers working on different platforms or with different clients, we suggest signing up for something like QuickBooks Self-Employed. Or, look for a free freelance income spreadsheet template like this one here that will allow you to organize all of your income so that you don’t forget anything (pro tip: follow the link above and you’ll find lots of other helpful templates for freelancers from Bonsai!).

Now, when it comes to business-related expenses, you’ll find that most income spreadsheets for freelancers also have areas where you can input expenses. This includes home office expenses, transportation, equipment, etc. We suggest keeping a digital record of all receipts. However, it’s definitely worth speaking with a tax professional at least for your first year just so that you can understand what qualifies as a “business expense” in your industry.

Another recommendation to keep control over your work income and expenses as a gig worker is to have a separate bank account from your personal finances. Mixing your work and personal resources in the same account can often cause confusion and difficulty when filing your taxes. Just go ahead and keep everything separate.

Need more helpful freelancer tools and apps? Check out our ranking of the best Financial Tools for Gig Workers.

How to Increase Deductions as a Freelancer or Gig Worker

Did you know that as a self-employed worker, at least a portion of the 15.3% labor tax as an independent contractor (12.4% Social Security and 2.9% Medicare) is also deductible? Similarly, contributions to a 401(k) retirement plan can also be deducted from your taxes. So, yeah, you’ve got options! The tough part is usually figuring out which ones apply to you.

We’ve created a basic guide to help walk you through some of the Best Tax Deductions for Freelancers in 2022. Read through it to learn about the basic tax deductions you probably can use regardless of the type of work that you do.

It’s important to note though that if this is the first time you’re filing your taxes as a freelancer or gig worker, consider hiring a professional. It’s worth it for the first time just so that you can understand your specific options as they relate to your gig work, expenses, and tax bracket!

Feel like you need a better understanding of your general finances before you start thinking about taxes? We’ve got you covered. Take control of your financial future. Download the Wealth Stack app today, the financial tool for freelancers looking to build something truly big.