1040 Tax Form Through Glasses

view of 1040 tax form through glasses focused only in lens

The gig economy is booming, and while workers enjoy the freedom it gives them to earn money, the IRS looks more closely at their tax returns. Independent contractors were cited as among those most at risk of failing to accurately report all of their income, according to a survey by the National Association of Enrolled Agents, an organization of tax professionals. A fast-growing worker movement, the “gig” or “sharing” economy refers to people who are employed as independent consultants and freelancers rather than full-time employees.

It’s not just Uber drivers, Etsy makers and people who rent out their homes through Airbnb. It’s finance and tech workers, lawyers, part-time college professors, temporary or on-demand workers, freelance writers and editors, and anyone else with a side gig. Government economists estimate that 40 percent of people will be a part of the gig economy by 2020.

If part or all of your income comes through the sharing economy, there are plenty of things to consider when it comes to filing your taxes.

What’s taxable

If you receive income in the form of money, property or services, the government wants its share.

“If the activity is conducted in a for-profit manner, it’s considered a business activity; and while it can and does complicate things at tax time, each activity needs to be reported with the related expenses included in the deductions for the activity to which they apply,” said Steven J. Weil, enrolled agent and president at RMS Accounting, Fort Lauderdale, Florida.

For example, if one drives for Uber and Lyft, that would be one activity with income from two sources, reported on one schedule C, he said. If one drives for Uber and rents a room in her home on Airbnb, that is considered two activities, and each should be reported separately.

Even bartering results in income, said Steven Fromm, an estate planning, tax and small-business attorney in Philadelphia, Pennsylvania. If you exchange goods or services without exchanging money, those goods or services have a dollar value that must be included in the income of both parties, Fromm said.

What’s deductible

Similar to full-time workers, people in the gig economy can also deduct their business expenses, depending on the situation.

“The test is ‘ordinary and reasonable’ expenses are deductible if they are directly associated with the business activities. Remember that the IRS requires documentation supporting the deduction,” Fromm said. For example, ride-sharing drivers may qualify to claim the standard mileage deduction, which was 53.5 cents per mile for business miles driven in 2017.

“Whether your involvement in the sharing economy is full-time, part-time or an occasional side gig, you can deduct expenses that relate to your business,” said David Cross, editor of the blog BestAirbnbHostingTips.com. “Some common expenses include cleaning supplies, guest room items and mileage. You don’t need to form an LLC or corporation to be able to make these deductions, either.”

Home rentals

According to the government, you’re a landlord if you rent out your home — or even a room in your home or apartment — for more than 14 days per year.

“Anything above that amount results in some complicated tax rules being triggered, depending on the type of rental activity involved,” Fromm said.

Crowdfunding

“Funds raised through crowdfunding might be considered current taxable income, investment capital or even tax-free gifts. It all depends on how the money is raised and what is promised to those doing the actual funding in return for the funds received,” Weil said.

Estimated payments

“Self-employed people can pay their income and self-employment taxes by making quarterly estimated tax payments to the IRS,” said Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre, New York. “If you expect to owe at least $1,000 in federal tax for the year, you should pay estimated taxes. These taxes are paid ... in April, June, September and January. (You only need to pay if you’ve actually earned income. So, for example, if you don’t make any income by March 31, you can skip the April payment.)”

Record keeping

“To manage your taxes, the new economy requires complex choices and requires careful planning. Record keeping is more important than ever. It’s also imperative that you have a knowledgeable and qualified tax professional who understands the tax laws as well as the activity you are participating in,” Weil said.

“If you don’t receive a 1099 form for income you earned during the year, you’re still required to report that income and pay taxes on it,” Zimmelman said. “So you should keep very detailed records of all your business activities, income and expenses to protect yourself from filing an incorrect tax return. Save all receipts and paperwork related to income and expenses. This is especially important if you need to calculate the percentage of business use and personal use of any shared expenses, like a cellphone.”

Retirement planning

“The self-employed should seriously consider setting up their own retirement plans to allow for putting more towards retirement than what an IRA allows,” Fromm said. The self-employed have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans, including simplified employee pension, 401(k) and savings incentive matching plans, according to the IRS.

For more information, talk with your tax professional or visit the IRS Sharing Economy Tax Center, https://tinyurl.com/y9zsvqcr.

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