Taxes and the Gig Economy
For new entrepreneurs, paying the IRS can be tricky
En español | So you've joined the gig, or sharing, economy, making money by renting out bedrooms, giving strangers a ride in your car or taking some task that another person doesn't want to do. Congratulations!
Now, for the other part of the sharing economy that can trip up many new entrepreneurs: taxes.
You'll likely owe income taxes on your earnings — even from part-time gigs. And unlike working for an employer who withholds taxes for you, in the sharing economy, it's up to you to maintain records and make sure you've set aside enough money to pay the IRS.
Not surprising, many novices in this emerging industry are confused about what the IRS requires of them — so much so that National Taxpayer Advocate Nina Olson, who represents consumers on IRS issues, told Congress last year that the agency needs to develop materials and a web page to help sharing-economy workers understand their tax obligations. A few months later, the IRS launched the online Sharing Economy Tax Center to do just that. Taxes can be complicated for newbie entrepreneurs.
If you're filing a return on your own, here are a few basics you need to know:
You're the Boss
If you're driving for Lyft or Uber, or running errands for TaskRabbit, the IRS considers you self-employed.
Your earnings will be subject to regular income tax. But if your profit is $400 or more per year, you will also owe self-employment taxes on the amount that exceeds that threshold, says Mike Slack, lead tax research analyst at the Tax Institute at H&R Block.
You'll pay a self-employment tax at a rate of 15.3 percent on this net income. This tax covers both employer and worker contributions to Social Security and Medicare.
Now that you're self-employed, you may have to make estimated tax payments — generally by the 15th of April, June, September and January. Failing to do so can lead to a penalty for underpayment of taxes.
However, you may be able to avoid the hassle — and the penalty — if you're still working for an employer. Have your employer increase its tax withholdings from your paycheck by filling out a new W-4 form so it will be enough to cover any taxes you might owe from your extra job, Slack says. The IRS offers an online calculator to figure the correct withholding.
It doesn't take much for the IRS to consider you a landlord. Rent out your residence — or even just a room in it — for more than 14 days during the year, and it's considered a rental property.
You'll pay regular income taxes on this rental income. As a landlord, you likely won't be subject to self-employment tax, Slack says. However, provide "significant services" such as transportation, meals or other concierge-type services and you can trigger self-employment taxes, too, he says.
It's not all about paying taxes. You may be able to deduct some or all of your work-related expenses and lower your tax bill.
For instance, ride-sharing drivers can deduct fuel, repairs, maintenance, insurance and other car-related expenses. You have to make sure, however, that you claim only the portion of those costs related to the ride-sharing job — not for personal use of your car. Or you can make things easier for yourself by just taking the standard mileage deduction — now at 53.5 cents per mile.
"For most individuals, the standard mileage will give you the better benefit, and it's easier to work with," Slack says.
If you're renting out your home, you may be eligible to deduct advertising, depreciation, utilities, insurance and other rental expenses. As with drivers, you will only be able to deduct a portion of these expenses that are related to the business — not the full cost if you're using the home for personal use, too, says Mark Luscombe, principal federal analyst at Wolters Kluwer Tax & Accounting.
For more information on rental property deductions, see IRS Publication 946 on depreciation and Publication 527 on residential rental real estate.
"It's important to keep your own records in any situation when you are self-employed," Slack says.
Some businesses, including Uber and Lyft, will provide 1099-K tax forms that track payments made to you. Airbnb follows IRS rules and will send a 1099-K if you earned more than $20,000 and had more than 200 transactions for the year.
"Just because you don't get a 1099-K doesn't mean you don't owe the taxes," Luscombe warns.
Also, these forms don't capture all your activity and you could be missing out on deductions. You might, for instance, get a summary on the miles you've driven passengers, but not for the distance you logged to pick up customers, tax experts say. And that mileage is deductible, too.
That's all the more reason to carefully document all your expenses and activities in the sharing economy.
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