The Gig Economy is an activity where people earn income providing on-demand work, services, or goods. All Income from Gig work needs to be reported on your tax return. The company you are working with must only report it to IRS on Form 1099 if it is over a certain limit. You must report your income even if you only earned a few dollars. Income includes cash, credit, check, and trading or bartering.
If you are doing Gig work, you are running your own business, and you need to keep track of income and expenses. Gig workers may want to consider getting a Federal Identification Number (FEIN) for their business. This is the business’ equivalent of a Social Security Number. The FEIN allows the business owner to provide this number instead of your Social Security Number for business-related tax reporting. FEIN can be used to open bank accounts or credit cards in the business name, loans for the business, and to issue Form 1099s, if needed. Obtaining a FEIN keeps the business owner from having to give out their Social Security Number and potentially putting their identity at risk.
IRS requires each business to set up a separate bank account for business income and expenses to run through. The same recommendation is true for credit cards. Have one dedicated to business only transactions. You do not want to commingle business and personal income or expenses.
In an IRS audit, commingling funds is an excuse for IRS to disallow business expenses because they cannot determine if it is truly a business or personal expense. This can result in additional taxes and penalties. Keeping clean and separate records is the easiest way to ensure you pay only the income tax you legally must pay.
Expenses need to be ordinary and necessary to be deductible. This means the expenses need to be necessary to run your business. Many times, when you call a rideshare service, there is water and maybe snacks for the rider. These are justified business expenses. Water and snacks would not be a justified expense for a delivery driver.
It is important to remember to keep the original receipts for all business expenses. If IRS requests proof of an expense and the original receipt cannot be produced, it becomes an unallowable expense. There are many ways to record expenses. Computer software such as QuickBooks or Quicken, excel spreadsheets, and even accounting ledgers are acceptable forms of records. You must still have the original receipts in case of an audit.
The type of business often determines the type of expenses that can be deducted. General business expenses like rent, utilities, storage, and repair or maintenance costs are obvious. Website fees, advertising, Internet fees are often deductible as are supplies. Bank charges, app fees, insurance, accounting, software, are deductible if incurred. Some expenses must be deducted over time using depreciation rather than all in one year. Equipment and buildings are examples of this.
Clothing expenses such as suits for a professional or sneakers for a personal trainer are not deductible; they are considered personal expenses. Cell phones and computers can be partially deductible if used both personally and for business. Travel costs such as hotels and airfare might be fully deductible if the trip was all business or partially deductible if there was a mix of business and pleasure. Educational expenses can be deductible if they are maintaining a skill but would not be deductible if learning a new skill not to be used in the current business. Interest expenses have special tracing rules that determine if the interest is deductible or not.
Mileage can be deductible if for business-related purposes. You need to maintain a mileage log if you want to qualify for the mileage deduction. This is where many people struggle. The mileage log can be written or digital (if it is printable). The mileage log needs to include the date, destination, business purpose, start and stop odometer readings, and miles per trip. Without a detailed mileage log, the mileage expense cannot be deducted on the tax return. For a delivery driver or rideshare worker, this can be a very costly bite in taxes.
While some of the apps may keep track of mileage, it is your responsibility to determine if the app is recording it correctly. For a rideshare worker, the app may not know that you are running a personal errand or headed home and count that as business miles when it is not.
Vehicle expenses like gas, maintenance, lease payments, tires, registration fees, title fees, insurance, and vehicle depreciation can be deductible if using a personal vehicle for business purposes. These are not 100% deductible as the personal vehicle is still used for personal use. These expenses get pro-rated based on business use verses personal use of the vehicle. If half of your total mileage for the year is business-related, the total of your vehicle expenses would be multiplied by 50%. Receipts for each expense and a mileage log are needed to be able to calculate deductible vehicle expenses.
You cannot take the mileage deduction and your actual vehicle expenses; you must choose one method. You can calculate which method gives you the larger deduction. If you take the mileage in the first year your vehicle is used for business-related activities, you can switch between mileage or actual expenses, whichever gives you the larger deduction. If you take actual vehicle expenses in the first year of business use, IRS does not allow you to switch back and forth between mileage and actual.
You may be able to take a deduction for your home office. There are two ways to calculate this deduction. The Simplified Option allows a portion of your residence that is used exclusively and on a regular basis for business purposes to be used as a deduction. The square footage of the space in your home used for business (not more than 300 square feet) multiplied by the current rate of $5.00 would be your deduction. This method is meant to cover all of your household expenses related to business use of your home like homeowner’s insurance, utilities, taxes, mortgage interest, and depreciation.
The Regular Method uses the square footage of space used for business purposes divided by the total square footage of your home. If the square footage of the space you are using for business-related activities is 200 square feet and your total home square footage is 2,000, then you are using 10% of your home for business.
Records for homeowner’s insurance, utilities, taxes, mortgage interest, repairs, and maintenance must be maintained for this method. Depreciation deduction is allowed under this method as well. When using The Regular Method, it is important to know if your home is sold in the future, the depreciation taken over the years will have to be recaptured, making part of the sale a taxable gain.
It can be extremely helpful to have a small business consultation to make sure that you are aware of all the deductible expenses for your type of business. You also want to make sure you are maintaining the required information to get those deductions.
Gig workers may need to pay estimated tax payments on the income earned. Gig workers are self-employed no tax is withheld from the income earned. The tax on this income may need to be paid quarterly if sufficient withholdings are not occurring elsewhere. The taxpayer may be subject to an underpayment penalty when the tax return is filed if he or she fails to be pay in taxes as required.
Estimated tax payments are due:
• April 15th for income and expenses from January 1 through March 31
• June 15th for income and expenses from April 1 through May 31
• September 15th for income and expenses from June 1 through August 31
• January 15th of the next year for income and expenses from September 1 through December 31.
Gig workers are subject to Self-Employment tax on income earned in addition to income taxes. When you are an employee, Social Security tax and Medicare tax are withheld from your paycheck. The employer pays equal amounts of Social Security and Medicare for the employee.
Self-Employment tax is the Social Security and Medicare tax paid on the income earned. Self-Employment tax is due when a taxpayer has net earnings of $400 or more in self-employment income during the year.
If you or someone you know is considering work in the Gig Economy, make sure you learn what is required before starting a business. Being prepared can make filing taxes easier and less stressful. Keeping detailed records of income and expenses helps the business owner keep more income earned in their pockets without paying undue taxes, interest, and penalties.
