According to recent data from the Federal Reserve, nearly one out of every three Americans is involved in the gig economy (aka “sharing economy”).
Strategy: Find out about the tax consequences. Workers in the gig economy have tax obligations and opportunities like those of other self-employed individuals.
Notably, you must pay taxes on your earnings, but you could be entitled to some offsetting deductions.
Here are 5 tax tips that can help you avoid problems and maximize available tax benefits.
- Don’t hide taxable income. ‘Fess up to the IRS about the earnings from your gig, even if it’s only a sideline business. For instance, if you receive payment in the form of money, goods, property or services, the income is taxable on your personal return. In addition, separate cash tips must be treated as taxable income. See IRS Pub. 334, Tax Guide for Small Business, for more details.
- Report large cash transactions. Any business taxpayer, including a participant in the gig economy, who receives more than $10,000 in cash in a single transaction (or in a series of related transactions) is required to file Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, within 15 days after receiving payment.
- Green light biz deductions. Generally, you can deduct ordinary and necessary business expenses incurred as a participant in the sharing economy, including deductions for your vehicle if you’re an Uber or Lyft driver. For 2020, you can use a flat rate of 57.5 cents per business mile (down from 58 cents per mile in 2019), plus related tolls and parking fees, instead of deducting your actual expenses. Similarly, an Airbnb landlord can write off most business expenses. Typically, the deductions are claimed on Schedule C as a self-employed.
- Avoid estimated tax penalty. If you’re participating in the gig economy, you will have to make quarterly installment payments of “estimated tax” or adjust your withholdings from another job, or both. Use Form 1040-ES, Estimated Tax for Individuals, to help figure out these payments. Generally, to avoid an estimated tax penalty, you must pay at least 90% of your current year tax liability or 100% of the prior year’s liability (110% if your AGI for the prior year exceeded $150,000).
- Keep good records. Recordkeeping is essential for tracking taxable income and deductible expenses. This also helps you substantiate claimed deductions if the IRS ever challenges them. Your recordkeeping system should include a summary of all business transactions. Generally, it is best to record transactions daily. Want to know more? The IRS has created the “Sharing Economy Resource Center”. It is designed to aid taxpayers participating in the gig economy.
Source: Small Business Tax Strategies, April 2020