One note: As always, you don’t have to pay Social Security and Medicare taxes on unemployment benefits.
What tax forms do I need to file?
If you earned more than $400 in 2020 through gig or freelance work, you will need to file Schedule SE, in addition to Form 1040 or Form 1040 SR. The SE in that form stands for “self employed.” It’s the document you’ll use to figure out how much of the money you made working for yourself should be taxed.
Be aware that the tax hit for being self-employed may seem worse than it was for jobs in which you worked for an employer. When you have an employer, in most cases you and the company evenly split the amount that you are required to contribute to Social Security and Medicare. When you are self-employed, you are expected to cover the full 12.4 percent for Social Security (if you earned $137,700 or less) and 2.9 percent for Medicare, but you can also deduct the half that would be paid by an employer.
If you are doing gig work, there are a few ways you can plan ahead to avoid a big self-employed tax bill at the end of the year.
- You can make quarterly estimated tax payments throughout the year using Form 1040-ES (Estimated Taxes for Individuals) or Form 1040-ES (NR) (U.S. Estimated Tax for Nonresident Alien Individuals). Estimated taxes are due on four dates: April 15, June 15, Sept. 15 and Jan. 15.
- If you have an employer and do gig work on the side, you can adjust your withholding on your W-4 form with your employer so that it also effectively withholds taxes on your self-employment income. You can use the IRS’ Tax Withholding Estimator to figure out how much you should adjust your W-4 with your company.
- Make sure to keep good records of all the expenses from your self-employed/gig work throughout the year. These documents can be used for valuable deductions come tax time.
What deductions can I take?
You may be able to deduct many of the expenses related to your self-employed work, but only if you keep good records. For instance, you can take a deduction for your cellphone, but only for the portion of the bill that pertains to your gig work — not the full amount. Similarly, you can take a deduction if you work from a home office; however, it must be a dedicated space used primarily for your self-employed work, not just a desk in your living room. In any case, you’ll need backup receipts and records, in case the IRS wants further proof of your expenses.
One big deduction you should make sure to take is the half of the Social Security and Medicare taxes that would normally be paid by an employer. That deduction is worth roughly 7.65 percent of your pretax income if you earned less than $137,700 in 2020. You may also be able to claim a deduction for your health insurance costs.
Kenneth Terrell covers employment, age discrimination, work and jobs, careers and Congress for AARP. He previously worked for the Education Writers Association and U.S. News & World Report, where he reported on government and politics, business, education, science and technology, and lifestyle news.