Gig-economy workers often are unaware of tax liabilities
The gig or sharing economy is tempting more Americans to earn extra cash by offering rides, renting out rooms or providing other freelance help. It all sounds great, but there are some important tax issues to beware.
The one simple rule here is that the income derived from such jobs is nearly always taxable. Things get more complicated when you factor in deductible expenses, record-keeping requirements and estimated payments.
In a survey last year of members of the National Association of the Self-Employed, slightly more than one in three respondents said they didn’t know they needed to file quarterly estimated tax payments and didn’t know what records they needed to keep. Four in 10 weren’t setting aside money for taxes.
“Many of the new service providers in a sharing economy may not fully comprehend their taxfiling obligations or have any experience with the requisite tax record-keeping,” Nina Olson, the National Taxpayer Advocate, wrote in a report to Congress. Many of these people “will need to spend significant time learning about their tax-compliance obligations and devote many hours to record-keeping,” she said.
Here are key tax tips to note:
INCOME: IT’S TAXABLE
Income from gig-economy jobs is almost always taxable, unless specifically excluded. Such compensation includes not just wages and salaries but “bonuses, commissions, tips, fringe benefits, severance pay, rewards and other similar items,” a report by tax researcher Wolters Kluwer notes. Taxes could apply to compensation “in any form,” including that received in cash, the company said. According to Olson’s report, 99% of wages subject to withholding in traditional employee/ employer relationships gets reported to the IRS, but compliance drops for non-employee independent contractors.
FIGURE EMPLOYMENT STATUS
Tracking the expense side of the equation is more complicated, but first you need to determine if you’re an employee or an independent contractor.
Usually, gig-economy workers are classified as independent contractors, Wolters Kluwer noted. That’s because independent contractors control or direct the “means and methods of accom- plishing the work,” such as by owning the vehicle that provides ride-sharing services. Employees, by contrast, typically don’t control what work will be done and how it will be done. (For more details, see IRS Publication 1779.)
If you are an independent contractor, nobody will withhold income or employment taxes on your behalf. Rather, you become responsible for these and other obligations, including self-employment taxes and estimated taxes, if applicable.
DEDUCTIONS AVAILABLE
The flip side is independent contractors are allowed to deduct various expenses tied to their business activities. People who use their vehicles to provide rides can deduct a standard mileage rate or they can separately track and deduct relevant expenses. These include outlays for gas, maintenance, insurance and the like, along with less-obvious expenses such as depreciation or lease payments, tolls and parking fees. “If you use your car for both ride-sharing and personal transportation, you can deduct only the portion of your expenses that apply to the business use,” Turbo Tax noted.
To the extent you use a mobile phone to find customers or otherwise perform the job, you may deduct these expenses, too.
HOME-USE COMPLEXITIES
People who rent part or all of their homes, using airbnb or a similar service, can deduct various ongoing expenses such as property taxes, insurance, mortgage interest and maintenance. This, too, demands detailed record-keeping that can get complicated.
“Expenses must be allocated between rental and non-rental days and, if only a portion of the home is rented, between the rental and non-rental portions,” Wolters Kluwer said.
All this is fairly similar to the deductions and record-keeping required of ride-sharing businesses.
But with a home, things get trickier because when the owner sells, these deductions become relevant in figuring possible capital gains.
That is, owners generally can exclude gains of up to
$250,000 (if single) or
$500,000 (if married) on a primary residence (subject to tests for ownership and personaloccupancy or “use”). But they can’t exclude capital gains on the portion or time allocated for business.
In other words, the capitalgain exclusion wouldn’t apply to the amount of time the home was used as a rental or the portion of footage devoted to this purpose.
Taxes could apply to compensation “in any form,” including that received in cash, tax researcher Wolters Kluwer notes.
Reach Wiles at russ.wiles@ arizonarepublic.com or 602-444-8616.