3 Tax Tips for Gig Workers in the Sharing Economy by Richard Cabrera, JD, LLM, CPA
In today’s sharing economy, individuals need little more than an Internet connection to become self-made entrepreneurs. Thanks to platforms such as Uber, Airbnb, TaskRabbit and Upwork, there are countless opportunities for individuals to make money driving cars, renting out rooms or providing on-demand services, either as their primary source of income or as a side gig. However, it is important that participants in the gig economy understand how their services affect their tax liabilities. Here are some quick points to keep in mind.
Income is Taxable.
The IRS considers gig workers to be independent contractors who must report and pay taxes on the income they earn, including cash payments. Income is generally taxable regardless of the amount of time individuals engage in a specific activity or whether or not they receive an income statement, such as Forms W-2 Wage and Tax Treatment, 1099-MISC for Miscellaneous Income, or 1099-K for Payment Card and Third Party Network Transactions.
In many instances, the IRS requires online platforms that facilitate transactions between consumers and gig workers to report to the IRS workers’ income when it exceeds $20,000 and/or when workers conduct more than 200 transactions in a given year. In contrast, freelance workers who do not use sharing platforms to secure work can expect to receive Form 1099-MISC, a copy of which is also provided to the IRS, when they receive income of $600 or more in a tax year.
Pay Taxes as You Go so You Don’t Owe.
Independent contractors must pay self-employment taxes in addition to federal income taxes. Gig workers can make estimated tax payments to the IRS throughout the year to cover these tax obligations rather than waiting to pay a significant tax bill when they file their tax returns.
Alternatively, freelancers who are considered to be employees of either an online platform or another business have the option to withhold more taxes from their paychecks by adjusting their exemptions on IRS Form W-4, Employee Withholding Allowance Certificate. It is beneficial for workers to meet with tax advisors to ensure that the correct amount is withheld from their income. When workers do not withhold enough tax, they may owe a significant tax bill at the end of the year and also be liable for estimated tax underpayment penalties. If they withhold too much tax, workers may unintentionally reduce their cash flow, give the IRS an interest-free loan, and lose out on opportunities to invest those extra dollars or benefit from compounding interest.
Take Qualifying Deductions to Lower Taxable Income.
The Tax Code allows individuals to deduct certain “ordinary and necessary” costs of doing business from their gross income. These deductible business expenses may include the costs of cell phones; wireless and Internet service plans; certain auto expenses, such as gas, oil, insurance, tune-ups and repairs; fees for parking and tools; and food and drinks. However, because freelance workers use their phones, cars and other items for both personal and business use, it is important that they carefully separate out and claim as a deduction only the business portion of these expenses. The IRS has very strict rules regarding what satisfies the business-use substantiation standards, including a requirement to maintain contemporaneous records, which can be very difficult for workers to implement when their gig is a side job. Alternatively, gig workers who use their cars for companies like Uber or Lyft can instead claim a standard mileage rate deduction or 53.3 cents per mile when they use their car for business purposes.
Similarly, taxpayers who earn income from renting out a house or an apartment must divide their use of the home between personal and business purposes in order to calculate the appropriate deductions of mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation, they may claim in a given year. It is important to note, however, that the IRS will generally not allow a taxpayer to deduct rental expenses that exceed the gross rental income limitation.
Independent contracts and freelancers represent a growing segment of the U.S. workforce who face unique tax compliance challenges. Engaging the services of professional tax accountants can help these workers meet their tax obligations and take advantage of potential tax benefits.
About the Author: Richard Cabrera, JD, LLM, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning, consulting, and mergers and acquisition services to businesses located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.