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Tax Tips for the Gig Economy

Payroll
Article
08/31/2016

Updated: September 6, 2016

If you earn money through Uber, TaskRabbit, Guru, Upwork, Elance, or another company that uses your talents and resources on an as-needed basis, don't overlook your tax obligations for these earnings. Working in the "gig economy" may classify you as an independent contractor. As such, you're responsible for your income taxes as well as your Social Security and Medicare taxes on your gig income. Here are some tips:

Keep Records

To handle your tax obligations, you need good records of your income and expenses.

  • Separate your personal and business finances. Use a separate business bank account and credit card for your business activity so you don't confuse your business finances with your personal finances.
  • Use an accounting solution. There are numerous software and cloud options for this, such as Quickbooks, Freshbooks, and Xero.
  • Use apps. There are various apps available for your smartphone or tablet to track business expenses such as business mileage on your personal vehicle (e.g., MileIQ).

Take a Home Office Deduction

You may be able to write off the costs of a home office that you use to do your work or keep your records, schedule gigs, and do other administrative tasks. At a minimum, if you qualify for the home office deduction, you can deduct $5 per square foot of home office space (up to a maximum deduction of $1,500).

To qualify, the space must be used regularly and exclusively for business, and you can't have another business location for your gig. For example, if you use your home office to write blogs on a freelance basis, you can qualify for a home office deduction if you use the space where you write regularly and exclusively for this business activity. Find more about the home office deduction from the IRS.

Save for Retirement

Some people work in the gig economy out of necessity. Some do it because the extra money is an additional bonus that complements a current salary. For some, they work exclusively on gigs. If you can afford it, consider sheltering some of your earnings by saving it through a qualified retirement plan or IRA. Doing this gives you an immediate tax break as well as saving for retirement income in the future.

For example, in 2016, you can save up to $53,000 in a SEP, which is a retirement plan that doesn't require any annual filings, even if you have a job and are covered by an employer plan. You can contribute to a deductible IRA or Roth IRA, but there are income limits on deductible IRAs if you're covered by another plan or for Roth IRA contributions. The rules for qualified plans are in IRS Publication 560; the rules for IRA/Roth IRA contributions are in IRS Publication 590-A.

Avoid Estimated Tax Penalties

If your gig turns out to be profitable because your income is greater than your expenses, you'll owe taxes on your profits. And you'll owe self-employment tax to cover Social Security and Medicare taxes if you have net earnings from self-employment (i.e., you're profitable). You can't wait until you file your return to pay your taxes because the U.S. has a pay-as-you-go system. Two strategies to consider:

  • Adjust wage withholding. If you have a job, you can increase withholding to cover the taxes on your gig income. If you don't have a job, but your spouse does, he/she can adjust withholdings to cover your taxes.
  • Pay estimated taxes. These are quarterly payments covering income taxes, self-employment taxes, and certain other federal taxes. However, you don't have to make a payment if the amount you owe when you file your return is no more than $1,000.

Work with a Tax Professional

For more information about the gig economy, visit the IRS Sharing Economy Tax Center. If you have any special issues or concerns, or don't have the time or interest in doing your taxes yourself, work with a CPA or other tax professional. Likely you'll be able to earn more money from your gig in the time you'd otherwise spend on taxes than you'll have to pay a pro for this work.

 

barbara weltman

Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books. She has been named a Small Business Influencer for five years in a row.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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