June 23, 2021

A record number of people now consider themselves to be part of the gig economy. These workers, who deliver food and shop for items, among other things, on behalf of someone else, don’t usually qualify for benefits like health insurance, or even more importantly, unemployment. However, thanks to the legislation put into place last year due to the COVID-19 pandemic, these workers became eligible for unemployment benefits. The issue with this is the fact that it complicates things come tax time. For those workers who haven’t yet filed their 2020 tax return, or are still subject to unemployment at this time and will need to include it in their 2021 tax return, the IRS has a number of options.

What Is the Gig Economy?

The term “gig economy” is used to describe workers who primarily obtain jobs from an app. They drive taxi-like cars for Uber and Lyft, perform random tasks on TaskRabbit, shop for groceries using Instacart, and deliver meals for users of apps like Uber Eats, DoorDash, GrubHub, and Seamless. Ideally, these workers could be called freelancers, because they take on tasks for pay when needed, and do not have a traditional boss. However, the main difference is the fact that most freelancers have a specialized skill that they are paid for, such as writing or creating digital art.

Gig Workers and Unemployment Benefits

Like freelancers, gig economy workers do not receive regular paychecks that have taxes taken out of them. They are also not provided benefits like sick days or paid vacation, and they are usually not eligible for unemployment benefits. This changed in 2020, thanks to the legislation produced by the U.S. government and signed into law by then-President Trump, that allowed freelancers and gig economy workers to receive unemployment for a certain period of time. The COVID-19 pandemic and the massive layoffs and furloughs that went along with it, cut into the amount of money made by gig workers, who found themselves delivering fewer meals and driving less people from place to place.

Although the unemployment benefits provided to them helped with any monetary shortfalls, it complicated their already complex taxes. Gig workers are taxed like freelancers and sole proprietors, and must pay additional amounts in taxes to make up for the fact that they do not have an employer paying some tax dollars on their behalf every paycheck. In addition, the unemployment they received complicated how they report their income. Thankfully, the IRS has made things a bit simpler for them.

The Importance of Saving Receipts and Forms

Gig workers probably already know that they need to hold on to all of their receipts and other financial information, including forms that report the amounts of unemployment that they receive. However, the importance of saving these things needs to be emphasized:

  • Receipts – Any receipts that you receive from the orders that you deliver (which may include information on the delivery fees and tips that you receive) should be saved so that you have a record of how much money you have made every month from the various gigs that you work.
  • Payment Information – This is something that’s crucial to hold onto, especially if you work for more than one gig economy site. The amount of money that you get in the form of payments from each gig needs to be written down or catalogued in a spreadsheet, so you can reference it later. Each app may have this information on hand, but in case something goes wrong (such as if your account is hacked or you can no longer access the app), you need to have this information on hand.
  • Tips – Most gig workers receive tips for the work that they do. In most cases, these tips are included with their payments, such as delivery fees. However, this is not always true, so it’s crucial to note every tip received, as they count as payments. You will need to declare your tips on your tax return, and they may or may not bring you into a different tax bracket, depending on how many of them you’ve received.
  • Other Expenses – In addition to saving information about the payments and tips that you receive, you also need to note your expenses. Things like fuel and car repairs, as well as coolers and ice packs (for keeping groceries cold) may be deducted from your taxes owed, depending on whether or not you qualify for such a deduction. (It all depends, so it’s best to check with a professional tax preparer to ensure that this is done correctly, lest you end up getting audited.) Again, keep every receipt that you have for these particular items.
  • Unemployment Information – One thing that is new for 2020 is the ability for gig workers to receive unemployment compensation for income that they lost during the COVID-19 pandemic. Since this is a fairly new thing that some workers may not be used to, it’s important to note that they need to save everything related to said unemployment, including any payment stubs (even emailed ones) and records of all money received, as well as amounts taken out for taxes.
  • Bank Records – Since some gig employers do not send payment forms and other information, simply sending the funds into a bank or PayPal account, it’s crucial for gig workers to hold onto their bank records, so they can pull up any amounts received throughout the year. Bank statements for each month may also be requested by any professional tax preparers that the gig worker consults with at tax time.

Unemployment Tax Reporting Forms

Every gig worker who received unemployment during 2020 should have a received form 1099-G from their state. (Keep in mind that some states do not send out paper forms, meaning that these gig workers need to log into their state’s portal and download a PDF version of the form.) This form reports any unemployment income that the worker received. The most important lines on the form are Box 1, which lists all of the unemployment income received, and Box 4, which states the amount of federal taxes that have been taken out.

2020 IRS tax forms have corresponding lines for the information listed on the form 1099-G, and those match the ones on the state form itself, so it should be easy for gig workers to add that information to their tax return and properly report it as income. However, there are a few things that have changed, thanks to the legislation passed in March of 2021 that provides an additional benefit to members of the gig economy as far as their taxes are concerned.

Federal Tax Relief on Unemployment for Gig Workers

There has been one major change to unemployment compensation that is reported on 2020 tax returns – gig workers do not need to pay any federal taxes on this money. Thanks to the American Rescue Plan, which went into law on March 11, 2021, unemployment compensation up to $10,200 is exempt from federal taxes for workers who fall under certain income limits. What does this mean for gig workers?

  • If You’ve Already Submitted Your 2020 Tax Return

If you have already sent in your 2020 tax return, you do not need to do anything. The money that you paid in federal taxes on your unemployment, as long as it’s under the $10,200 threshold and you qualify under the income limits, will be refunded to you. The IRS will do this automatically, and there is no need to file an amended tax return.

  • If You Haven’t Sent in Your 2020 Tax Return

For gig workers who have not yet sent in their 2020 tax returns, despite the fact that the deadline was May 17, 2021, any federal taxes that were paid, yet qualify for tax-free status based on the limits, can be properly listed on your return, so you receive that money back as a refund.

  • One Thing to Note

In some cases, the change in income levels, with the adjusted federal tax exemption, may allow some gig workers to now qualify for the Earned Income Tax Credit, or EITC. If this is the case, they will need to submit an amended tax return to the IRS for the year 2020. This allows them to properly claim the credit, and, depending on the circumstances, they may receive additional money back in the form of a tax refund. However, this is not the case for everyone.

Contact Us Today

If you are a gig economy worker and are worried about how to report the unemployment that you’ve received to the IRS, then reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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