Here's what to know before filing:

1. Start prepping now

2. Know what you owe

3. Keep good tax records

4. The Gig Economy Tax Center on the IRS website is a good starting point if you’re new to the 1099 universe. 

5. Gig workers are subject to federal taxes on their net income as well as a 15.3% self-employment tax on net earnings above a certain amount.

6. This includes driving for Uber or Lyft, delivering food or groceries, or selling goods online.

7. Like any other self-employed person, gig workers can lower the income tax they owe by claiming relevant expenses.

8. The gig economy is integral to millions of Americans' livelihoods, and the IRS is itching to take its share.

The IRS says the gig economy includes any "activity where people earn income providing on-demand work, services or goods," such as ride-sharing and delivery services, running errands, and selling products online. That means if you earned money from Uber, Lyft, Postmates, Instacart, Etsy, or a similar company, you may be on the hook for federal income taxes.

That's because the IRS requires that anyone earning non-W-2 income from a job be classified as an independent contractor, even if they also hold a job as a W-2 employee. These contract workers are subject to the 15.3% self-employment tax and federal income tax on their additional income, which they can pay through estimated quarterly taxes or by increasing their withholding at any W-2 job.

How to pay taxes on gig economy income

As it relates to the 2023 tax season — when you file taxes for income earned in 2022 — businesses that paid you for on-demand work may send forms to the IRS to report those payments depending on how they classify and pay workers. Common forms include 1099-NEC (Nonemployee Compensation) and 1099-K (Payment Card and Third Party Network Transactions).

The IRS says businesses are required to file a 1099-NEC form for workers who they paid more than $600 throughout the year. You should receive copies of these forms by early February.

If you don't receive these forms, you'll need to rely on your own payment records to report all net income earned from temporary or part-time sources on your tax return. You'll have to pay income taxes on your net earnings (your gross income minus any related expenses). Plus, if your net earnings are more than a certain amount, you'll also be responsible for self-employment tax on that amount. ( confirm amount for the year of taxes)

If you plan to continue earning income from side jobs, make sure you adjust your withholding though any W-2 job or know the due dates for paying quarterly taxes so you don't have to pay penalties or face a large bill when you file your return.

How tax deductions work for gig workers

Don't forget that gig workers are classified as independent contractors by the IRS, which means they're entitled to tax benefits for the self-employed. 

As a gig worker, you'll need to report all your income to the IRS, but you can also reduce the amount of taxes you pay on that income by claiming relevant deductions. And if the expenses turn out to be more than the income — meaning your "business" had a loss — you can deduct that loss against your other income for two years before the IRS considers the activity a hobby and disallows the deduction of losses.

Generally, an independent contractor can deduct any expenses that are considered "ordinary and necessary" for their trade or business. This might include insurance, state and local taxes, interest, travel, and phone or office supplies associated with operating and maintaining your business. It can also include the cost (or partial cost) of a home office or car that is used for conducting business.

As a self-employed worker, you can also deduct the employer portion of the self-employment tax — 7.65% of your net earnings — from your gross income to arrive at your adjusted gross income (AGI). And you may be eligible to deduct 100% of the cost of your health insurance premium from your AGI if you're not covered by another employer's plan.

For more information on filing your taxes as an independent contractor, check out the Gig Economy Tax Center page on the IRS website.