The gig economy has made side business a norm. Whether it is Uber or Fiverr, professions across virtually every industry are now earning money as a side business. Plumbers and electricians are working on TaskRabbit as are homeowners renting their property on Airbnb.
There seems to be no end to what the side business has become. And this has introduced a new set of issues for these workers because the IRS is looking to tax you on these earnings.
Before you get your side business up and running, it is important to fully understand what your tax implications are. But before that, it is just as important to identify what a gig work or side business is.
Gig Work
According to the IRS, gig work is an activity you do to earn income. More often than not, these jobs are on a digital platform, such as an app or website. Although this list doesn’t begin to cover all of the types of gig work, here are some from the IRS:
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Sell goods online
- Rent equipment
- Provide creative or professional services
- Provide other temporary, on-demand or freelance work
The digital platform in which these jobs are found match services or goods from workers with customers. Some of the access these businesses provide are:
- Ridesharing services
- Delivery services
- Crafts and handmade item marketplaces
- On-demand labor and repair services
- Property and space rentals
Again, it is not limited to only these platforms. More industries are using technology to increase their market share using digital technology.
Understanding Your Side Business Taxes
What are the steps you should take to make sure you address the tax liabilities for your side business? If you are engaging in a gig activity to make a profit, then you’re in business and have tax responsibilities of a self-employed individual.
In this case, it all starts by tracking and keeping all of your records for income and expenses during the year. This includes all receipts related to the work you are doing, which will come in handy when it is time to deduct expenses and complete your tax return.
Keeping this record will also help you in determining how much you will owe Uncle Sam. If you budget throughout the year for the share of your taxes, you get caught off guard when you get the bill. Even if you are off a bit, it won’t be as bad as coming up with the whole thing.
If you owe $1,000 or more on your federal tax return, estimated tax payments are required throughout the year. You can make the payment online through the Electronic Federal Tax Payment System or IRS website and app.
1099 Form
If you get at least $600 as an independent worker from a business you work for, keep an eye out for a 1099 form. Depending on what the company you worked for files, you might receive a 1099-K or 1099-MISC (1099-NEC for services performed after 2019). You will then use it to fill out the Schedule C form with details of the income you earned.
It is important to remember, even if you don’t get a 1099 form, you are still responsible for tracking your earnings and expenses and paying the taxes accordingly.
Track Your Income
Most of the side hustles people are doing today are with digital platforms. This means the money you earn is tracked in the app you use to interact with your customers.
If there isn’t a platform for tracking your income, there are a number of online tools you can use. Another way to keep a better record of your side hustle is by opening separate bank, credit and debit card accounts. This will get rid of the hassle of weeding out your business expenses from everything else anytime you need to do your side business taxes.
Expenses
When you carry out the task for your side hustle, you will have expenses. With proper tracking, you can deduct qualified business expenses.
If you are a driver for Uber or Lyft, the mileage, repairs, depreciation, car insurance, and even the bottles of water you provide to your customers may qualify for a deduction. On the other hand, a designer can deduct a home office, internet cost, supplies, and other tools of the trade. You can get apps to track your expenses so you will know each business expenditure.
The Impact to your Personal Taxes
If your side hustle is only a portion of your overall income, it will affect your personal taxes. It will make the overall filing process more complicated and your tax bill is also likely to be higher.
But if your gig work is profitable, you may be able to take the qualified business income deduction on your personal return and reduce what you’d otherwise pay on your gig activity profits.
Check out the IRS’s Gig Economy Tax Center for information. If it gets too complicated, consider hiring a professional to help you address your new tax liabilities. Because the implications are rather dramatic. The change can affect everything from retirement to student loan interest deduction, financial aid for your kids, and more.
Taxes for a Digital Platform
If you are a business operating a digital platform with gig workers, you have to classify your workers correctly. You also have to meet requirements for information reporting and tax withholding, filing, and depositing.
It all starts by classifying workers. Are your employees or independent contractors? According to the IRS, most types of workers fall under the common law rules for worker classification. You are either an independent contractor or in business for yourself, or you hire or contract with individuals to provide services to your business. The IRS provides a more thorough breakdown of the classifications here.
Once you start paying your workers, report your payments using form 1099-MISC.
And when the time comes filing and paying your taxes you may be required to pay different types of business taxes. Remember you have to file whether you have taxable income or not. If you don’t file a return and pay your taxes on time, it can result in penalties and interest.
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You’ve got to anticipate that you’ll pay both sides of the social security tax and your regular tax rate on that income. Most people don’t do withholding on their 1099 income, so that means you’ve got to be saving from 20%-30% of that income for the tax bill that’s coming.
Every business needs to file taxes. It is important that you have the knoedledge. This can become quite complicated if you don’t know what you are doing.