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3 Things to Consider if You’re new to gig work

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3 Things to Know if You’re New to Gig Work

by Kelsey Sheehy Senior Writer | Personal finance, small business Kelsey Sheehy is a senior writer and NerdWallet authority on small business. She joined NerdWallet in 2015 and worked for six years as a personal finance journalist and spokeswoman before shifting gears to focus on the financial decisions and challenges that small-business owners face. Kelsey’s articles have appeared in The New York Times, The Washington Post, Nasdaq and MarketWatch among others. She is also the author of a column about millennials and money in The Associated Press along with some other NerdWallet writers. Kelsey has appeared as a guest on «Today» show, NBC News and ABC’s «World News Tonight» and has been quoted by the Los Angeles Times, CNBC, American Banker, NPR and Vice as well as other publications. Prior to being a part of NerdWallet, Kelsey covered college (and how to pay for the cost) for U.S. News & World Report. The location of her work is Washington, D.C.

Jan 29, 2021

The edit was done by Kirsten VerHaar, the Senior Assisting Editor eBay and Yahoo! Kirsten VerHaar edits for personal finance. She holds an English literature degree from the University of Colorado Boulder. In previous positions she was the lead editor at eBay as well as a manager of an entire team of writers who produced coverage for eBay’s content team across the globe. She has also written for Yahoo. After she joined NerdWallet since 2015 she has covered subjects as diverse as vacuums (yes, really) budgeting, as well as Black Friday.

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Shutdowns, layoffs , and reductions in salary caused by the have resulted in millions of Americans looking for alternative sources of income. Anyone who has recently switched to working gigs could be days away from a financial surprise in the shape of tax bills that aren’t expected and insurance coverage fine print.

«These are the two most crucial things that entrepreneurs are unaware of,» says Chris Russell who is a professional certified in financial planning who specializes in business owners and self-employed.

Don’t consider yourself as a small-business proprietor? We’ll start with that.

To the IRS, you are a small-sized business

You’re running food deliveries. However, that’s not enough to make your business a small one according to the IRS. And that opinion is the only one that counts when it comes to taxation.

«Basically, you’re considered to be an independent contractor» Says Garrett Watson who is a senior policy analyst at the Tax Foundation, a nonprofit organization. «You aren’t required to create anything complex. There is no need to incorporate or do anything like this.»

However, you must pay taxes on any money you earn from gig work. This fact is often an unpleasant, and costly shock for new gig workers. As an employee, your income and tax on payroll are automatically deducted from your paycheck. This isn’t the case for freelancers, Russell says.

«No taxes are taken out of the profits you earn as a business owner,» Russell says. «Meaning that you will likely have to pay a large amount in tax to IRS as you prepare your tax returns.»

A useful rule of thumb is that you should follow is: for every dollar you earn through gig work, set aside 30% to put toward income and . Going forward, plan to estimate and pay those taxes on a quarterly basis to avoid penalties due to the IRS.

If you’re thinking «I didn’t earn much. I won’t report it. What will the IRS be aware?» Don’t. It’ll know.

Make the most of your money

Monitor all your expenses in a glance to see your spending patterns and spot opportunities to save money.

The expense tracking app is your most trusted partner

Gig work isn’t all cash in the bank. There are costs to consider as well. Be aware of them since you could take some of them off and lower your tax bill we talked about just a moment ago.

«Keep good and honest records to take advantage of any deductions you’re entitled to,» says Ryan Greiser, a certified financial planner from Doylestown, Pennsylvania.

Apps such as Stride, Hurdlr and MileIQ automatically track your mileage and expenses for free or a minimal cost to help you calculate taxes. Based on your specific situation, Greiser suggests QuickBooks might be worth exploring.

«It is a small expense to estimate your quarterly taxes, monitor your mileage , and pay your quarterly tax online,» Greiser says.

You also want to investigate the specifics of what is able to and cannot be deducted, based on your slice of gig job, Watson says, pointing to ride-hailing services as an example.

Imagine you drop a rider off and then drive to catch the next one He says. Are you able to deduct the cost of fuel used between rides? (You can. )The is a good resource to find answers to your questions.

Insurance can be complicated

The IRS isn’t the only agency which needs to be informed about your new stream of income. Your insurance agent needs to be aware, too. The failure to disclose your work can get you dropped from your insurance policy in certain cases. In addition, your insurance agent can assist you in understanding what aspects of your gig work are covered.

Transporting food or people? You should know the extent to which your auto insurance policy covers incidents while you’re on the job (It most likely won’t.). Rideshare or commercial auto insurance might help fill in the gap.

The platform you’re using on may cover you under commercial insurance, it only kicks in only in certain circumstances. It is important to understand the specifics of the policy.

Uber and Lyft provide commercial coverage to drivers, but this coverage is available only if there are passengers in your car or are in the process to collect a passenger after accepting the ride. DoorDash offers liability insurance only and only when food is in your vehicle. Grubhub and Instacart don’t provide any commercial coverage for delivery drivers using their platforms.

The article was written by NerdWallet and was originally published through The Associated Press.

About the author: Kelsey Sheehy is a personal finance journalist at NerdWallet. Her writing has been highlighted by The New York Times, USA Today, CBS News and The Associated Press.

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