Tax Planning in a Gig Economy
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 pandemic; Americans are being laid off and having to remain at home or socially distance. Without a primary income source, people have turned to other solutions to pay their bills. Companies such as DoorDash, Uber, Amazon, and Fiver all offer individuals the ability to earn income by doing work for companies and individuals. People who sell artwork, wrap Christmas presents, or perform handyman services are also examples of individuals who could earn income on the side. If this sounds like you, there might be some tax implications to take into consideration.
Self-employed vs. W-2
Unlike a normal employed job where you receive a Form W-2, side gigs are reflected as independent contractors, and issues a Form 1099. If you made at least $600 from an entity that was not your employer, you can expect one of these forms. 1099 wages are considered self-employment earnings, which are 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. The benefit of this is the 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 mileage driven 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 dedicated space.
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? Can you deduct the transaction fees paid to payment processors like PayPal or Stripe? 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
Pictures of your home office
Receipts 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. With some consideration throughout the year, you can take charge of the additional complexity and minimize your tax liability.