Getting your paperwork in order is particularly important since nearly half of the people working in the on-demand economy don’t know that they can deduct their expenses or don’t know how to do so, says Jamie Sutherland, general manager for U.S. Products and Solutions at Xero. According to a Xero survey, some 73 percent of on-demand freelancers don’t deduct any expenses at all. Not deducting any expenses can make you leave money on the table.
In addition to the standard 1040, you may have to fill some other tax forms. To help you file your return correctly and make sure that you’re claiming all the tax breaks you’re eligible for, here’s a brief guide to some of the things you should consider — right before the quickly approaching deadline.
Regardless of the type of gig you had last year, one thing you have to do is report all the income you earned. If you were a ride-sharing driver with Uber or Lyft or offered services through TaskRabbit or Thumbtack you’re considered self-employed. That means you should use the Schedule C tax form to report the income and expenses from your business.
If you’re actually in the real estate business, or, say, you run a bed and breakfast and provide substantial services to your guests, then you also should use Schedule C.
To help you fill out the Schedule C form for your on-demand job, you should use the Form 1099 that you may have received. The form outlines how much you were paid last year and may include certain expenses that the platform charged you for its services. (You may be able to deduct those fees — more on that later.) If you did not receive the 1099, then it could be because you didn’t meet the threshold to receive the form. But you still have to report that income on Schedule C, according to the Internal Revenue Service.
But if you rented the place that you live in through sites such as Airbnb and VRBO, then figuring out how to report your rental income can be a bit complicated. If you rented out your place for fewer than 15 days, you don’t have to report your income from those days, and you can’t claim any deductions, according to the IRS. (Consider this a gift from Uncle Sam.) But if you rented your home for more than 14 days a year, then any rental income you collect must be reported. Hopefully you kept tabs on all of that. And because you’re not considered self-employed just because you have rental income, you should report the income on Schedule E, not Schedule C. You’ll owe ordinary income taxes on this income. (We’ll get to more on taxes later).
Expenses and deductions
Deducting the expenses you incurred from your gig-economy work can help lower your tax bill. If you’re an Airbnb host, for example, the kinds of expenses you can write off are ones related to running a rental property (but personal expenses are not allowed). That could mean cable service for the rented period, advertising and legal fees, any extra insurance you obtained and professional house-cleaning services. You can even deduct maintenance and repair expenses as long as they’re not improvements to the property. For example, if a renter breaks a window, you can deduct the cost of the new window, but you can’t deduct the cost of installing storm windows. (IRS Publication 527 explains all of this.)
If you drive for Uber, you want to make sure to deduct expenses related to using your car for your “driving services” business. Take into account the miles you drive not just when you have a customer in your car, but also when you are driving around waiting for a customer after turning on the app. The easiest way to do this is to use the standard 57.5 cents per mile deduction for business, which takes into account the wear and tear on your car,and what you spent on gas, oil, tires, licenses, repairs, etc.
In some cases, you may be better off deducting your actual car expenses, such as if you have an older car that has high service costs, says Mark Nash, a partner in the Personal Financial Services practice at PricewaterhouseCoopers.
Other things you can deduct include parking fees and tolls, but not traffic tickets. You also can deduct things such as the cost of getting your car washed (but only if you pay someone else to wash it), the snacks and drinks that you provide for your riders (but not the snacks you eat), and the cost of your phone calls (but only those for your job).
Also, don’t forget to deduct expenses such as the safe-driver fee that were included in your Form 1099 and any fees you were charged to use the platform.
Finally, if you ran your business out of your home, say for TaskRabbit gigs, you may be able to take a home-office-expense deduction. This applies only if your use of it meets specific requirements. The home office must be a space that is used exclusively and regularly as the principal place of business.
“The dining room where the family eats dinner and the children do their homework would not meet the ‘exclusive’ test,” says Jackie Perlman, principal tax research analyst at the Tax Institute of H&R Block.
Basically, you have to regularly use the space as an office, not just every once in awhile, and you can’t use it for anything else.
Likewise, if you have a phone or computer in the home office that you use for personal tasks, then the office is not “exclusively” used for the business.
To find out more steps you can take in this category, visit the IRS website where the government gives detailed instructions on how to figure out your tax deductions.
Losses from rental property are treated differently from losses from self-employment, mainly because rental activity is considered a passive activity that generates income from the use of property, not the provision of services or a business activity. So if it turns out that your Airbnb rental expenses are more than your rental income, then you can use those losses to offset income from other passive activities, but not from any business or trade in which you materially participated. If you don’t have any passive income to offset, then you can carry this amount forward to offset future rental income. Basically this will allow you to reduce your tax liability in future years.
But if you have losses from self-employment, then you can use the losses to offset other income, including wages from another job. But you can’t have losses forever. The IRS assumes that you have a “profit motive” when you operate a business (remember, you are self-employed) and expects you to generate income over time. If your business never makes a profit, then the IRS may consider that you have a hobby and not a business. A prudent business person wouldn’t continue to throw good money after bad, Nash explained.
Keep in mind that there aren’t any new or special tax laws just because you’re working in the gig economy.
“If you drive for Uber, Lyft or have a TaskRabbit gig, you are self-employed. If you rent your home through Airbnb you are considered a landlord and follow the same tax laws as individuals who have rental property,” stressed Lisa Greene-Lewis, CPA and TurboTax expert.
If you are self-employed, you pay the 15.3 percent self-employment tax, which is made up of 12.4 percent for Social Security and 2.9 percent for Medicare (half of the self-employment tax is deductible).
When you work for a company, payroll taxes, which include Social Security and Medicare taxes, are normally automatically withheld from your paycheck. But if you’re self-employed and expect to owe at least $1,000 in taxes, you’re supposed to pay your estimated taxes each quarter.
But if you’ve waited until now to pay your taxes, then you might be subject to penalties and interest. (When you are an employee, your boss withholds and pays these amounts for you throughout the year.)
Wrapping it up
Finally, if you’re not sure about something, then you should consult a tax professional. As self-employed technology consultant Andy Malmgren of Digital Handyman, explained, “My first rule of business taxes is CYA — call your accountant.”