The content of this post is not intended to replace the advice of a licensed tax professional. Consult a qualified tax professional for questions specific to your individual circumstances.
The gig economy is alive and well. According to a recent Gallup poll, 57 million workers are part of the gig economy, either as their primary means of employment or as a supplement to their regular full-time job.
Having a side gig can help you make ends meet or save up for tuition or other big-ticket item. If you’re a retiree, a side gig is a great way to supplement your retirement income. You’ll also remain connected to the working world.
In either case, working in the gig economy can also wreak havoc on your taxes if you’re not careful. Getting hit with a big tax bill can defeat the purpose of having a side gig. It’s important to understand the potential tax pitfalls before you agree to become a part of the gig economy.
Despite the current debate in California over job classification, the IRS will consider you self-employed, even if you work for companies such as Lyft, Uber, Instacart, GrubHub or other large gig economy players.
You’ll need to attach a Schedule C addendum to your regular tax return. You can prepare the schedule yourself or have your tax pro prepare it for you during tax season. Either way, the Schedule C will state your income, losses, and expenses.
You’ll be subject to self-employment tax, which is the combination of Medicare and Social Security tax.
In some instances, you’ll need to pay quarterly taxes.
Suppose you spend weekends doing airport runs for a ride-sharing service such as Uber or Lyft. In that case, you can deduct your related automotive expenses, so hold on tight to those gas receipts and oil change receipts.
The same applies for your auto insurance, and a portion of your registration renewal.
In order to do this, you’ll need to keep spotless records: business and personal mileage, repairs/maintenance, parking fees and tolls. Be sure to stash the receipts in a paper file or in the Cloud with a budgeting or accounting app.
If you have a home-based business, keep track of all of your home office-related expenses. Computer supplies, subscriptions for computer apps, utilities, and printer paper could be deductible.
The same applies to your phone bill. If you use your phone for texting or speaking with clients, hold onto your bill payment stubs. You’ll need them when calculating your phone expense at the end of the year.
While you can’t deduct your entire home as a home office, there is hope. You can deduct a percentage of your home’s square footage as part of the home office deduction.
You have the option of either itemizing home office space deductions or utilizing a flat-rate deduction based on total square footage. Check with a tax pro for the best option in your case.
Keep in mind the IRS has very specific rules regarding home office deductions, and what is eligible for this deduction. Since self-employed individuals are at a higher risk of an audit maintaining current and accurate income and expense records is key to verifying your income and expenses.
Don’t Run Afoul Of The IRS
If you work for a large sharing platform such as Uber, Lyft, AirBnB, Instacart or similar, they will issue you a 1099-MISC form at the end of the year. A copy of this form is also sent to the IRS, so it’s important that you report all of your income. Failure to do so could mean an audit and/or additional taxes, penalties and fees.
Keep the 1099 with all of your other tax documents.
Stay on Track, Stay On Time
Pay all of your taxes on time. Paying on time is essential in avoiding late fees and penalties.
Working a side gig can be personally and financially rewarding. If you’re among the 36% of U.S. workers with a side gig, stay on top of your income and expenses. Keep all receipts and records related to your side gig, and report all income and expenses on your tax return.
Doing so will keep you on the IRS’s good side, and will keep you out of trouble.