As our economy expands and changes, an increasing number of people are taking advantage of opportunities to earn extra income with side jobs or “gigs”. For example, money received from Lyft, Uber, eBay, Airbnb, Grubhub and other similar companies is taxable.
Don’t be caught by surprise
It is important to note that your side gig income (and the related expenses) need to be reported. Some of these app-based services do not issue a Form 1099-MISC to the service providers. This does not mean you are off the hook. All revenue you receive for providing services is subject to income tax regardless of the source of the payment. If you are paid in the form of cash, goods, property or virtual currency for services you provide, the income should be reported on your tax return.
What you should know about paying taxes in the expanding gig economy
Report your business income on Schedule C
Income from gigs such as delivery services, ridesharing services, selling goods online or other creative or professional services should be reported on Schedule C. Common deductions for this type of income include the cost of any amenities you give your customers (such as water or gum if you do ridesharing), other supplies, business license fees, additional car insurance required for the job, credit card transaction fees, and a percent (of business use) of your cell phone bill.
If you use your vehicle regularly on the job, you have two options for deducting the expense:
- Many use the standard mileage deduction as it requires less record keeping. For 2020, this deduction is $0.575 per mile for business use of your vehicle.
- You can also use a business use percentage of actual expenses such as gas, repairs, insurance and lease expense.
Records must be kept for either of these methods. There are mileage tracking apps available to help with this task.
If you have income reported on Schedule C you may be subject to self-employment tax, which is the Social Security and Medicare tax (deducted automatically for W-2 income).
Self-employment tax is 15.3% of net income from the business and will be shown on Schedule 2 of your individual tax return. However, half of the self-employment tax is generally credited back on Schedule 1.
Report rental income on Schedule E
Income from renting property should be reported on Schedule E for most casual renters. This includes income earned through Airbnb and VRBO. If you rent a room or property for more than 14 days in a calendar year, all rental income should be reported.
You should keep a record of how many days the property was rented as well as any personal use. Common deductions that can be taken against this income include repairs, cleaning or landscaping service, supplies, property tax, mortgage interest, small appliances, utilities, HOA dues, management fees, and advertising. It is also important with rental income to know if you are subject to any state or local tax.
The Good News
The good news comes in the form of the Qualified Business Income Deduction! As long as your income is from a true business activity, this credit can offset 20% of the income and result in a lower tax liability. However, this deduction phases out if your adjusted gross income is above the limits.
If you work for a service such as Uber or Airbnb you should receive a 1099 with your total income for the year if you earned more than $600. Regardless of whether you receive this form or not, your income must be reported.
It is important to maintain accurate records and receipts for any income and expenses associated with these activities. Also, if you earn more than $5,000 in a calendar year from a gig job, you may need to consider making quarterly estimated payments to the IRS to avoid underpayment penalties at the year-end.
Don’t neglect your tax responsibilities
If you’re busy with a side gig, it’s easy to forget your tax obligations. But it’s important to be prepared for a bigger tax bill. You should also make sure to claim allowable deductions, so remember to maintain accurate records and keep those receipts!
We can help!
If you have questions or would like more information about the tax implications for your specific situation get in touch with Shannon & Associates today.
By Elizabeth C. Brinkley