4 Tax Tips For The Gig Economy

Around 4 million workers are now part of the gig economy, rejecting routine 9-to-5 office work in exchange for piecing together a variety of jobs on their own terms.

Taxes, however, are still one of those terms.

If you're an Uber or Lyft driver, market your special skills via TaskRabbit or are a temporary landlord thanks to Airbnb, the Internal Revenue Service considers you an independent contractor. And with that status comes special tax responsibilities. Follow the tax tips below to keep Uncle Sam on your side.

Pay quarterly

The biggest tax responsibility as a gig economy worker is paying your federal income taxes in installments throughout the year. This is done by making estimated tax payments.

Estimated taxes are the self-employed worker's equivalent to payroll withholding taxes. When you have a traditional salaried job, a portion of your earnings go toward income, Social Security and Medicare taxes each pay period.

Taxes are withheld because we have a pay-as-you-earn tax system. This ensures the government has the money it needs to operate throughout the year. For taxpayers, it means we don't face one massive, lump sum payment when we file returns.

Gig workers meet this pay-as-you-go requirement by making four estimated tax payments each year. For most people, the due date for the first quarterly payment is April 15. Subsequent payments are due June 15, Sept. 15 and Jan. 15 of the following year.

Don't ignore tax deadlines

With all these taxes threatening your gig cashflow, it's tempting to ignore estimated payments and just pay your full tax bill when you file your annual return. Don't. You'll end up owing Uncle Sam more.

The IRS assesses a tax underpayment penalty on incorrect estimated payments. And the penalty is calculated separately for each of the four payment periods.

The penalty amount varies but can be several hundred dollars. The average penalty was about $130 in 2015, according to the IRS.

So even if you paid the correct total estimated tax amount at the end of the year, the IRS can fine you for not making payments in the earnings period(s) the taxes were due.

As the gig or sharing economy grows, the IRS has seen an influx of taxpayers subject to estimated tax penalties. The number has jumped from 7.2 million in 2010, to 10 million in 2015 — an increase of nearly 40 percent.

Write off your gig expenses

Gig workers can claim a variety of expenses against earnings to lower their tax bills.

Most gig workers file as sole proprietors using Schedule C to record their independent earnings and expenses, and then reporting the final income amount on their personal Form 1040.

A look at the Schedule C form gives you an idea of what kind of things you can claim, which range from business cards, advertising and costs for conferences, to continuing education resources.

But since you're working outside the traditional earnings box, don't be stuck there when it comes to tax deductions. The IRS says business expense claims are fine if they are ordinary and necessary for your industry. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your line of work.

This means, for example, if you specialize in carpentry jobs for TaskRabbit, tools you buy can be expensed. As a rideshare provider, the bottled water, candy and city maps you purchase for your passengers can be claimed. If you rent your home to vacationers, don't forget to count such things as cleaning services, maintenance and property insurance premiums.

If you use part of your home in connection with your gigs, you might also be able to deduct expenses for the business use of your home such as a percentage of your rent or utility payments.

Take advantage of apps

One thing that's the same for all taxpayers, regardless of the types of jobs they hold, is that all must keep records to prove tax claims in case an IRS auditor comes calling.

The easiest way for folks holding multiple jobs is to track their gigs and any potentially deductible expenses by using computer software and mobile apps.

Intuit's QuickBooks is the go-to program for millions of small business owners, and gig economy workers fall under that category. The QuickBooks Self-Employed app is an offshoot designed for independent workers who have multiple clients and income sources. Mileage tracking and quarterly tax estimations are among its features.

The QuickBooks Self-Employed app offers a 30-day free trial. If you like it, the basic plan will cost you $5 per month (for a six-month introductory period). The tax bundle option includes Intuit's TurboTax software, which can help you not only estimate quarterly taxes but pay them. The bundle is $12 a month (again, the discount lasts for six months).

Evernote is a popular app that's described by its fans as a digital file cabinet. You can create various notebooks, tag entries with keywords and search them from any of your synched devices. You can create, for example, a general tax notebook where you add photos of receipts or handwritten notes about a certain job. After a free trial, Evernote Business is $12/month.

Whether you're tracking miles you ferried paying passengers or those to get to a gig, you need to carefully keep up with your driving distances. TripLog lets you set preferences for how you'd like the app to automatically record and categorize road trips.

Its record-keeping system has all the travel claim fields required by the IRS, as well as areas for additional information about each trip. You can try it free for 30 days. After that, either stick with the free version or upgrade to the $1.50/month or $15/year plan.

And remember, if you do purchase a premium app or software program to help manage your gigs, that's a tax-deductible expense.

Kay Bell, an award-winning journalist and creator of the Don't Mess With Taxes blog, has been writing about taxes for two decades. The native Texan's work has appeared online, in print magazines, TV and radio broadcasts and in her FT Press/Pearson book "The Truth About Paying Fewer Taxes."

The post 4 Tax Tips for the Gig Economy appeared first on MoneyGeek.

Market News and Data brought to you by Benzinga APIs
Comments
Loading...
Posted In: EntrepreneurshipPersonal FinanceGeneralcontributorcontributorsGig Economy
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!