Since losing her job in advertising during the financial crisis, Dina Scherer has spent her days helping women cultivate their own personal styles – finding flattering color palettes, editing closets and taking customers on shopping excursions.
As a one-woman enterprise, she can be considered a card-carrying member of the so-called gig economy, receiving about half her client leads through Thumbtack, an online marketplace that connects consumers with an array of service providers, whether wedding photographers, music teachers, plumbers or organic cleaning services.
But there’s a reason the gig economy is also known as the 1099 economy, with the number a reference to the tax form issued to independent contractors: Workers in such arrangements are not employees of any company, and the onus is on them to run what is essentially their own businesses, even if the business is simply renting a room through Airbnb or providing rides through Lyft or Uber.
All independent contractors are responsible for handling their own taxes, keeping track of their potentially deductible expenses and familiarizing themselves with the requisite tax forms, all in time to send the forms to the federal government by April 15. (This year, it’s April 18.)
“It was intimidating” at first, said Scherer, who runs her image and styling agency, Modnitsa Atelier, out of a WeWork shared office space in New York City. Now, though, she has her income and expense tracking system down to a science, and consults an accountant come tax season.
There has been a lot of debate about how online platforms have changed the nature of work. In some cases, on-demand companies have been harshly criticized for making employee-like demands on workers but denying them basic benefits and protections.
In January, Lyft, the ride-hailing company, settled a lawsuit brought in 2013 by drivers in California who sought to be recognized as full-time employees. Though Lyft agreed to pay $12.25 million, its drivers remained classified as contractors.
But the gig economy goes well beyond providing rides on demand. For entrepreneurs, online marketplaces like TaskRabbit, Thumbtack or Etsy have become another avenue to generate leads for their own businesses. Then, there’s the chance for everyone to become a hotelier.
“While more Americans are turning to this kind of gig economy, they do face new and more complicated tax requirements,” said Kathy Pickering, executive director of the Tax Institute at H&R Block.
Where to begin? Here are several requirements the self-employed need to think about, particularly during tax season:
Independent contractors who haven’t set up any formal business structure (or who have, as a single-member limited liability company) should report their income through the traditional tax return, Form 1040. They will also typically use a Schedule C, which lists income and expenses, or perhaps a Schedule E, when collecting real estate income.
People running multiple businesses – say, selling photo prints on Etsy while driving for Uber – would need to keep track of all income and expenses separately, using dedicated Schedule Cs for each. There may be state and local tax forms as well.
Generally speaking, payments received directly from customers need to be tracked and reported when filing the tax return. But contractors working through a platform like Uber or Lyft, for instance, may be issued a 1099-MISC (which is required when income generated exceeds $600; it is also reported to the IRS). They may also be issued a 1099-K, which tracks income paid through credit and debit card payment networks. That all needs to be reported as well.
“One of the most common errors that gets made is people forget or miss reporting all of their income,” Pickering said. Independent contractors, she said, should track all income on their own, since some may be reported via 1099s and other portions may not. Many on-demand companies send annual earnings reports, too.
Employees generally split payroll taxes – which cover Social Security and Medicare and are automatically deducted from paychecks – with their employers.
But independent contractors who generate more than $400 in net profit are responsible for the entire amount, known as self-employment taxes. “No one shares that with you,” said Greg Rosica, a contributing author to the EY Tax Guide 2016.
Expenses and deductions
The added taxes may feel burdensome, but self-employment income opens the doors to a host of new deductions, as long as expenses are germane to the business.
“If you are doing things like Uber or a rides program, you can take your gas, your carwash, your vehicle licenses,” Pickering said. “That may not be obvious for someone getting into this for the first time.”
But there are also several broad categories of expenses that can apply to different businesses. People working out of their homes, for instance, can take the home office deduction, as long as the space is used “regularly and exclusively” for business purposes. If that’s the case, you can deduct $5 a square foot of dedicated office space, up to a maximum of $1,500. Alternatively, a more complicated calculation, based on actual expenses, could yield a greater home office deduction.
Phone lines and computers may also be deductible, separate from the home office expense, but if the time is split between personal and business use, that needs to documented. “The IRS won’t take your guess,” said Mark Luscombe, principal tax analyst at Wolters Kluwer. “These things should be contemporaneous. They don’t look kindly on you if you create records at the time of the audit.”
Transportation expenses – say, to meet customers – may also be deductible and can be accounted for in a couple of ways: When driving, you can either take the standard mileage deduction or actual expenses to operate the vehicle (lease payments, insurance, gas, oil) based on the ratio of business to personal use. Track both, then take the larger deduction.
Individuals who use their vehicles more than half the time for business may be eligible to deduct up to $25,000 of the cost, as long the vehicle meets certain specifications. “That is a great one for Uber and Lyft drivers, but it also goes for anyone with their own business,” said Lisa Greene-Lewis, a certified public accountant at TurboTax.
As part of the Affordable Care Act, individuals are required to have health insurance, unless they qualify for one of the exemptions. Self-employed people can deduct their health care premiums, as long as they buy the insurance through their business, while contributions to tax-advantaged retirement accounts, like traditional IRA and SEP IRAs – may also be deductible.
Estimated tax payments
Many self-employed people may need to make quarterly estimated tax payments during the tax year if they expect to owe more than $1,000 in federal taxes.
People who rent part or all of their homes for generally no more than 14 days – say, for just a few lucrative holiday weekends – aren’t required to report the income (and can’t deduct any expenses). But anyone who is renting a space for a longer stretch must generally report that income, along with expenses, on either a Schedule C or Schedule E of the tax return.
There’s quite a bit that can be deducted, items as varied as advertising and cleaning bills, property insurance, repairs and fees paid to agencies like Airbnb.
How much you can claim depends on how many days your home was rented, versus the time it was used personally. If, say, a beach cottage was available for rent all year, even though it wasn’t rented the entire time, all allowable expenses are deductible. But if it was rented for 85 days and you used it for 15 days, you can typically deduct 85 percent of expenses, according to EY, which wrote a guide on rental property income for Airbnb.
If you’re renting one room in an apartment, one of two methods can be used to calculate how to divide up the expenses: based either on the number of rooms in your home or on square footage.
State income taxes and perhaps even local taxes may be owed as well, so be sure to check with those authorities.
Airbnb, Lyft, Uber and others are working with tax and software firms to provide educational materials for their contractors, as well as discounts and tools.
QuickBooks Self-Employed, an accounting program and app, recently introduced a new automatic mileage tracking feature. And Xero Tax Touch is an app that helps on-demand workers keep track of their incomes and expenses on the go. The information can be transferred to a Schedule C at the end of the year.
Scherer, however, uses an old-fashioned spreadsheet, which helps her categorize expenses. It’s all easy to track, since she uses a dedicated credit card and checking account.
But her advice to new contractors? “If you are really fresh and don’t know anything, track everything,” she said, “You’d be surprised what’s deductible.”