What You Need to Know About Taxes If You Make Money in the Gig Economy
If you want to make some extra money , there are many options, from Airbnb to Lyft to Etsy . You’ve probably heard this is called the work economy, sharing economy, or on-demand economy. Whatever you call it, if you earn a portion of your income this way, you should be thinking about taxes. Here’s what you need to know.
Even if you earned little money, you (probably) have to pay
No matter what kind of work you do, the IRS expects you to pay taxes. When you get paid from a 9 to 5 standard job, your employer withholds those taxes for you . When you make money as a freelancer or independent contractor, such as if you signed up as a Lyft driver, the money you earn is not yet taxed. You must make sure you pay to the IRS.
This means that if you made any money from a side business, job, or concert, chances are you need to list it as earned income (yes, even cash tips). However, the rules get a little more complicated.
If your annual income exceeds a certain threshold, your employer or company must send you a1099-MISC or 1099-K to help you file your tax return. The 1099-MISC is usually for companies that hire employees as freelancers , while the 1099-K is for third-party companies like eBay, Paypal, Uber, etc. The threshold for 1099-MISC is anything over $ 599, and for 1099-K, that’s anything over $ 20,000 or over 200 transactions in a tax year.
However, just because you earn less than these thresholds or the company does not send you a form does not mean that you are not paying taxes. According to the IRS , you must track what you have done and report it when you return.
Renting a home, however, works a little differently. Let’s say you’ve rented a room or house with a service like Airbnb. If you turned it in for less than 15 days, you do n’t actually need to report income on your tax return. (Of course, you cannot deduct expenses related to this income, such as cleaning or cleaning costs.)
Of course, not everyone follows the rules. Some workers choose to receive cash in cash precisely because they might falsify their tax return. However, keep in mind that the IRS expects you to report all income you earn, even if it is from side jobs and even if it is cash.
You can deduct business expenses
On the other hand, you can deduct certain costs associated with your business.
Let’s say you’re an Uber or Lyft driver. You can deduct the use of the car as a business expense. You have two options to do this, you can either deduct the actual costs of using your vehicle (e.g. gas, maintenance, rentals), or you can use the standard IRS miles deduction , which is 54 cents per mile (for business use ).
However, most drivers probably use their cars for both shared and personal use, so it’s worth noting that you can only deduct those costs that are related to business use. In this case, it may be difficult to understand the cost, but good tools for the preparation of taxes, such as TurboTax and TaxAct, will help you in their decision , and a good tax professional can also help . TurboTax lists a few other deductions that drivers can make:
The commissions you pay to the car-sharing company are business expenses, just like any expenses you might have to pay for the technology installed in your car. Other tax deductions include:
- Car washes and interior cleaning
- Water, chewing gum or snacks for passengers
- Fares and parking fees
In addition, car-sharing companies usually require the use of a smartphone.
- Some of the cell phone costs associated with your joint work can be used to reduce your self-employment income.
- For simplicity, it might make sense to have a dedicated phone for work.
According to the IRS, if you rent a room on Airbnb, you may deduct “the usual and necessary costs of managing, maintaining and maintaining the rental property.” This may include expenses such as mortgage interest, property tax, depreciation, repairs, cleaning fees, and insurance. You can also deduct Airbnb fees (as well as eBay and Paypal fees) as advertising or banking fees.
However, if you only rent out a room or part of the house you live in, you cannot deduct 100% of your expenses. Again, you will have to split this between business and personal use, and a good tax preparer or tax program will walk you through this.
If you are freelancing in any other capacity, your deduction will vary from business to business, but remember to take a home office deduction if you work from home at all. Here’s another tricky rule to keep in mind: you don’t want to do double deductions. TurboTax explains how it works :
For example, you work as a freelance graphic designer and have a home office, but in the summer you also rent an apartment through Airbnb for two months. During this period, the rent for the apartment is deducted from the expenses of your Airbnb activities, not your activities as a graphic designer.
Otherwise, try to use all possible deductions. 99Discounts can help. Simply indicate what kind of work you do or what service you offer and the tool will display a complete list of deductions you can make in relation to your business.
You may have to pay quarterly taxes
Everyone has to pay taxes throughout the year. Again, when you have a standard full-time job, your employer makes these payments for you. This is called employee retention . When you make money from a company, business, or individual that does not withhold taxes, it’s up to you how to do it.
Throughout the year, freelancers and independent contractors pay indicative quarterly taxes, which pretty much look like this: estimated tax payments every April 15, June, September, and January. If you don’t pay enough at the end of the tax year, you will not only have to pay additional taxes but also pay a fine .
On the other hand, if you also work full time and make money as a freelancer on the side, you might not have to worry about quarterly payments. The IRS explains :
If you also work as an employee, you can often avoid paying estimated tax payments by withholding more taxes from your paycheck. This can be a particularly attractive option if, for example, your work in the sharing economy is just a part-time job or a part-time business. To do this, fill out a new W-4 form and give it to your employer.
The IRS makes it easy to pay your estimated quarterly taxes online , and this calculator will help you figure out how much you owe.
Finally, the IRS has a fairly detailed web page that you might find useful – the Equity Economy Tax Center . It covers all the basic ones outlined here, as well as some additional details for specific situations.