In recent years, we have seen a rise in side-hustles and gig work, where individuals take on part-time jobs or project-based work for additional income. This “gig economy” has been accelerated by the effects of the Coronavirus outbreak; Americans are being laid off and having to remain at home or socially distant. Without a primary income source, people have turned to other solutions to pay their bills. Companies like DoorDash, Uber, Amazon, and Fiver all offer individuals the ability to earn income by doing work for companies and individuals. However, this does not make up the entire market of gig work. People who sell artwork, wrap Christmas presents, handymen, and movers are all examples of individuals who could earn income on the side. We have seen how some side hustles can turn into profitable ventures, while others just use it to have extra spending money. If you took on additional sources of income during the pandemic, there might be some tax considerations you might not be aware of.
Tax Planning in a Gig Economy
by: Ian Coddington, Associate
Self-employed vs. W-2.
Unlike a normal employed job where you receive a Form W-2, most gig work will consider their workers independent contractors, and issue you a Form 1099. The most common form received for this work was a 1099-MISC, which is now replaced with the new Form 1099-NEC. If you were paid at least $600 from a business that was not your employer, you can expect one of these forms come tax time. How is this form different from your W-2? 1099 income is considered self-employment earnings, which is taxed differently than W-2 wages. When you work for an employer, they will withhold a percentage of your wages for taxes. However, when you are self-employed, you are subject to self-employment taxes and might be subject to estimate payments. Depending on your level of income and other withholdings, one benefit of this is there is a self-employment tax deduction, where you can deduct what an employer would have paid on your tax return. For delivery drivers, it is important to track your mileage, as you can deduct the allowable mileage expense against your self-employed earnings. If you used a home office for business, you could potentially deduct a portion of your mortgage, utilities, even repairs to that space. Prior to taking this deduction, you should review the rules closely
Meet with an Advisor
These benefits sound good, but what if you have unique situations for your side hustle? What if you are paid through cash apps like Venmo or Zelle? Can I deduct the transaction fees paid to payment processors like PayPal or Stripe? What if you receive a Form 1099-K? Questions like these can be answered by an advisor, like a licensed tax preparer. Here is a quick list of things to bring to a meeting with a tax preparer:
- Any W-2s or 1099s received
- Personal or business bank statements
- Information on your home office, including square footage
- Log of mileage
- Purchases for the business
Working a side hustle can be an exciting and hopefully profitable venture, however, it can add complexity to your tax return. Take charge of the additional complexity, gather the required documentation, and minimize your tax liability.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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