According to the Gig Economy Index from PYMNTS.com, nearly a third of workers in the US participate in the gig economy in some way, from driving for a ride-share app to renting out part of their home temporarily to providing specialized consulting to ……
Most like the gig work for the flexibility to earn extra income at convenient times. However, few think much about the taxes that will be due and for many, especially those that made significant extra income, the tax bill may come as a painful shock.
In the eyes of the IRS, a gig worker is a business owner. Generally, business owners are expected to pay self-employment taxes on their profit. Profit is determined by subtracting expenses from your income which means you need records of both.
Wage earners have taxes deducted from their income throughout the year. It is transparent to the worker. Gig workers have to make those payments themselves if they want to avoid a big tax bill at the end of the year. This is typically done by making estimated tax payments on a quarterly basis.
How much do you have to pay? A conservative amount would be to pay 30% of your profit at the end of each quarter. If your gross income is $1000 and your expenses are $300, you would make a quarterly payment of $210, say 90% of that to the IRS and the remainder to CO. You will also have to pay self-employment taxes on your profit, which is about 15% of the net.
How much is your profit? Here’s where the recordkeeping comes into play. Most of the first year gig workers we prepare taxes for have minimal records and pay a lot more in taxes than they need to.
So, here’s the dos and don’ts to help make sure you pay the minimum in taxes on that gig income.
- Keep your business income and expenses separate from your personal records. This will make it easier to periodically separate income and expenses. It can also prevent the IRS from looking at your personal records in the event of an audit.
- Use a phone app to keep track of business mileage. That can be a large deduction, especially for drivers. At tax time, you can take the choice of business mileage or business expenses, whichever is larger. You should also keep track of your total mileage for the year because if you have reason to take expenses instead of mileage, you have to know the business proportion of miles driven. If 70% of your miles were business related, you get to deduct 70% of your allowable expenses.
- Setup a home office for administrative functions. This can help you increase your business mileage and converts a bit of your personal expenses into business expenses. If done properly, there is no reason to fear an audit as a result of this deduction.
- The self-employment tax is also paid on net profit and will be determined when you file your taxes. It will be about 15% of the net. So, yes you will pay ordinary income tax on the profit and you will also pay self-employment tax on that same amount (reduced by half the self-employment tax owed). Self-employment tax is analogous to payroll tax and pays your social security and Medicare taxes. When self-employment tax becomes too painful, it will be time to look at other business entities. For now, be aware of all allowable deductions and keep meticulous records.
- Depending on the type of income you are earning, you may also owe sales and/or use tax on your business operations. These vary according to your locale.
- Other deductions that might be available to you include retirement contributions, health insurance premium deductions, hiring your kids,etc.
Need help? We offer free 30 min consultations to new business owners to help you start out on the right foot. We can also provide entity planning to determine the best fit for your business, whether that is a sole proprietor, LLC, partnership or corporation.
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