The rise of the gig economy has made side hustles commonplace. From Uber to Fiverr, professionals from almost every industry are now earning extra cash on the side. You’ll find plumbers and electricians on TaskRabbit, homeowners renting out their properties on Airbnb, and much more. But this new trend brings its own set of challenges, especially when it comes to taxes.
Before you dive into your side business, it’s crucial to understand what gig work is and what your tax obligations will be. According to the IRS, gig work is any activity you do to earn income, often facilitated by a digital platform like an app or website. This could include driving for a rideshare service, renting out property, running errands, selling goods online, providing creative or professional services, and more.
These digital platforms connect workers offering goods or services with customers. They’re not just limited to ridesharing or delivery services; they also include marketplaces for handmade crafts, on-demand labor and repair services, and property rentals. More and more industries are leveraging technology to expand their market share through these digital platforms.
Understanding your tax obligations for your side business is crucial. If you’re engaging in gig work to make a profit, you’re considered a business and have the tax responsibilities of a self-employed individual. This starts with tracking and keeping records of all your income and expenses throughout the year. Keeping these records will help you determine how much you owe in taxes.
If you earn at least $600 as an independent worker from a business, you should receive a 1099 form. This form will help you fill out the Schedule C form detailing the income you earned. Remember, even if you don’t receive a 1099 form, you’re still responsible for tracking your earnings and expenses and paying taxes accordingly.
Most side hustles today are facilitated by digital platforms, which means your earnings are tracked in the app you use to interact with your customers. If there isn’t a platform for tracking your income, there are plenty of online tools you can use. Opening separate bank, credit, and debit card accounts for your side hustle can also help you keep track of your business expenses.
When you perform tasks for your side hustle, you’ll incur expenses. With proper tracking, you can deduct qualified business expenses. For example, if you’re a driver for Uber or Lyft, you might be able to deduct mileage, repairs, depreciation, car insurance, and even the cost of water bottles for your customers. A designer, on the other hand, might be able to deduct the cost of a home office, internet, supplies, and other tools of the trade.
Your side hustle will likely affect your personal taxes, making the filing process more complicated and potentially increasing your tax bill. However, if your gig work is profitable, you may be able to take the qualified business income deduction on your personal return, reducing what you’d otherwise pay on your gig activity profits. If tax matters become too complex, consider hiring a professional to help you navigate your new tax liabilities.
If you’re a business operating a digital platform with gig workers, you have your own set of responsibilities. You need to correctly classify your workers and meet requirements for information reporting and tax withholding, filing, and depositing. This starts with classifying your workers as either employees or independent contractors. Once you start paying your workers, you’ll need to report your payments using form 1099-MISC. Remember, you need to file and pay your taxes on time to avoid penalties and interest.
