Filed under: Taxes
With the increasing popularity of the so-called sharing economy, more people than ever are getting paid for tasks like giving someone a lift, playing with dogs while their owners are on vacation or simply running an errand.
Here’s one task this new breed of freelance workers must not forget though: setting aside some cash for Uncle Sam.
“People get into this and think, ‘Here’s an easy way to make a few extra bucks,'” says Robert Reed, a financial advisor in Columbus, Ohio. “It is. But you also become independent contractors.”
Nearly 54 million Americans, more than one-third of the U.S. workforce, did some type of freelance work in the past year, according to a 2015 report from Freelancers Union and Upwork. Unlike traditional employees – those who get a W-2, for example – independent contractors don’t have income taxes and Social Security automatically withheld from their pay.
That means those who earn income via the sharing economy need to give at least 30 percent of their profits back to the government, depending on their tax bracket. This includes people receiving income from companies such as Uber, Airbnb and DogVacay, which enable people to connect with customers via apps.
Many first-timers don’t fully understand their tax obligations and get an unpleasant surprise come tax season. Avoid that shock and minimize your tax burden by planning ahead. These four tips will help you do so.
1. Do your research.
A simple Google search of “taxes, Uber” (or Airbnb, or TaskRabbit, or Etsy) will present you with at least a dozen articles, including common expenses you can deduct and what to do with the 1099-K form you may or may not receive.
Doing a little upfront research will put you a step ahead of most people who join the sharing economy, says Chris McDevitt, a tax professional and certified financial planner in Edmonds, Washington.
“Most people ignore taxes until after the first year,” McDevitt says. “It’s a big, big surprise.”
2. Think like a business owner.
You might not consider yourself a businesses owner – after all, you’re just doing odd jobs or watching puppies – but the IRS sees it otherwise. Thinking of your side gig as a company, rather than a hobby, will help you get in the mindset of tracking income and expenses.
McDevitt suggests setting up a separate bank account for your business and funneling all payments through that account. If you drive for Uber, for example, deposit any fares into your businesses account, and pay any business expenses such as gas, insurance and maintenance from that account.
Keeping detailed records doesn’t just apply to money coming in and going out. Sharing economy participants who use their car for business also need to log their mileage, separating business-related driving from personal use, for deduction purposes.
Services such as Uber and DogVacay send tax forms to drivers and hosts, but only if they meet a certain earning threshold. For DogVacay, that limit can be as high as $ 20,000 or 200 transactions, meaning a lot of hosts won’t receive a 1099 form to file their taxes.
That doesn’t mean you don’t need to report the income, though. Keeping detailed records will make it easier to sort out what you earned for the year, after expenses are deducted.
3. Seek out a tax pro.
If this is your first time having to file taxes with anything other than a traditional W-2, consider working with a professional tax preparer.
“Make sure you’re hiring a real professional and not someone who just does this for two months out of the year for tax season and that’s it,” says Reed, who notes that tax law around the sharing economy is still evolving.
A seasoned tax professional can help you identify business-related expenses to deduct, beyond more obvious ones such as gas or dog food.
Yulia Blyndiuk, 25, makes a living as a sitter through DogVacay. After hosting her first clients, two huskies, Yulia realized she needed to fence in her yard. That expense could be deductible, along with the postcards she sends to clients and any toys she purchases for the pups she hosts.
Working with a professional to prepare taxes your first year will help make you attuned to expenses and deductions. It will also familiarize you with the new set of tax forms you’ll be dealing with, such as a 1099-K, a Schedule C or a Schedule E. Then, in future years, you’ll likely know enough to do it yourself, if you choose.
“Typically, once you know what’s going on, the bookkeeping is usually pretty darn simple,” Reed says.
4. Pay quarterly.
The IRS expects the self-employed to pay their taxes over the course of the year, rather than in one lump sum on April 15. This typically applies whether you’re a full-time business owner or you simply make a little extra cash on the side.
These quarterly estimated tax payments are due annually on 15th day of April, June, September and January. Not paying these on time could result in fees and penalties, even if you’re due a refund at the end of the year. Tools such as QuickBooks Self-Employed can help you calculate and pay your quarterly taxes.
If you have questions about tax forms, expenses, deductions and the like, don’t bury your head in the sand. Ask a financial advisor now, and save yourself a headache come April 15.