Don't Get Audited! How Your Side Gig Needs to Handle Taxes
The gig economy is booming. In 2016, a TIME poll found that 45 million Americans offered some kind of good or service through an online platform, whether it was running errands, renting out their homes, or offering rides in their cars. With so many people earning extra income this way, you can bet that Uncle Sam wants its fair share of those earnings. Understanding some basic rules about taxes in the gig economy can help you avoid frustration and penalties.
Renting out your home
At $924 per month, Airbnb hosts command the highest average monthly income out of all others taking part in the sharing economy. Here are some key things to keep in mind if you rent your space. (See also: 13 Things I Learned From Renting Out My Home on Airbnb)
1. The 14-day rule
According to the IRS, if your rental property also serves as your residence, and you rent out the space for no more than 14 days during the year, you don't have to report those earnings as income. Note that you also cannot claim any deductions from rental expenses if you rent for fewer than 14 days per year.
Airbnb and similar companies will still report your earnings even if you're under the two-week threshold. But as long as you provide documentation that you meet the 14-day rule, you don't have to include rental income on your federal return. If you do have to report income, use Schedule C or E of Form 1040.
2. Deductible expenses
The IRS allows you to deduct a long list of applicable costs for your rental operation, including advertising, cleaning and maintenance services, utilities, property insurance, and property taxes. Check the rental section on IRS Publication 527 for a full list of eligible expenses.
You can deduct 100 percent of direct rental expenses such as fees to Airbnb and rental insurance, and allocate a portion of general expenses such as mortgage interest and utilities. If you only rent out a room that is one-sixth of the size of your home, you can only allocate one-sixth of a general expense.
3. Form 1099-K
When you earn over $20,000 and make over 200 transactions in a calendar year, Airbnb will issue you a Form 1099-K. Airbnb will mail you this form and keep an electronic copy under "Payout Preferences." This form is an IRS information return used to report certain payment transactions, which improves your voluntary tax compliance.
4. Pay attention to local occupancy taxes
On top of the IRS, you should also keep an eye on state and local government agencies. For example, throughout 2017 the House Finance Committee of Hawaii is evaluating an "Airbnb bill" to collect hotel room and general excise taxes from Hawaii-based short-term and vacation rentals.
5. Report rental losses
In the event that your rental operation goes sour, you can deduct losses up to applicable limits. Let's imagine that you own a $400,000 home and that you spent $400 to get a room ready for rental. However, nobody took you up on your offer. Per the IRS at-risk rule (for property placed in service after 1986), you can write off up to $400,000 in rental losses. So, you can deduct the $400 as a rental loss on your return.
Driving people in your car
Lyft and Uber drivers make an average $377 and $364 per month, respectively. Here are some tax-related pointers to keep in mind when declaring that income. (See also: How to Get a High Rating and Make More Money as an Uber Driver)
1. Keep track of all 1099s
Unlike a full-time employer, Uber and Lyft won't issue you a W-2. Instead, these and other ride-sharing companies issue two types of 1099 forms to most drivers.
Form 1099-K: Includes all payments that you received from customers directly related to driving.
Form 1099-MISC: Keeps track of all other non-driving income, such as payments for referrals and other types of bonuses.
While companies aren't required to issue a 1099-K unless you process 200 transactions or more (and make at least $20,000), and they're not required to issue a 1099-MISC unless you make at least $600, Uber and Lyft generally will issue those forms anyway just to remind you to report your income made through ride-sharing.
On Uber, access your tax documents by logging in to partners.uber.com and clicking "Tax Information." On Lyft, look for tax documents in the "Tax Info'" tab of the "Driver Dashboard" of your Lyft app.
2. Deduct applicable expenses
You'll quickly notice in Box 1a of your 1099-K that the reported amount is actually greater than what you received. The reason is that the reported amount in that box includes Uber's commission and other fees. On your Schedule C, Profit or Loss from Business (Form 1040), you can deduct those fees and other applicable expenses. Some examples are:
Bottled water and snacks for your passengers.
Business taxes and license costs.
Car cleaning expenses.
Car maintenance costs.
It's a best practice to keep a copy of all receipts so that you can back up your claims. One great way to do so is to open a bank account or credit card and use it solely for driving-related expenses. That way, your monthly statement becomes your monthly expense report. (See also: When You Should Get a Business Credit Card Over a Consumer Card)
3. Include mileage in your return
Within your 1099s, you'll also receive a summary for "On-Trip" mileage. For all business miles driven in 2017, you can deduct 53.5 cents per mile. So, if you were to drive 2,000 miles, you would deduct $1,070 (2,000 x $0.535) on your return.
You may also deduct additional miles that Uber and Lyft didn't report as long as those miles are directly related to your gig. Some examples are miles that you drove before a ride was canceled or on your way to meet an Uber or Lyft inspector. Keep a detailed log of those miles and include date, time, initial mileage, and final mileage.
4. Consider getting a separate smartphone
An internet-enabled smartphone is a key part of your operation. To make it easier for the IRS to identify what mobile phone expenses are related to your driving, get a new phone and use it exclusively for Uber or Lyft. This way you'll be able to deduct 100 percent of all phone costs, including cost of the phone, monthly charges for voice and data, and any essential accessory (chargers or mounts) from your driving income.
Tips for all side giggers
Whatever your gig, be sure you're keeping up with your taxes.
1. Report all income
From assembling furniture through TaskRabbit to delivering business supplies with Postmates, there are plenty of other ways to make money through the sharing economy. (See also: 13 Ways to Make Money Online That Aren't Scams).
All companies have to issue you a 1099-MISC once you make $600. Even when you don't hit that threshold and don't receive a form, report the income on your return. The IRS charges a 25 percent inaccuracy penalty on top of applicable taxes and interest for late payments.
If you happen to complete additional tasks or services for a client that aren't tracked on an app or website, it's a good idea to still include them in your income. When you're making the bulk of your income through the gig economy, your federal tax return becomes a key document to prove how much you make per year. This can be useful when applying for a credit card or other form of credit.
2. Make estimated federal and state tax payments
Lessen the tax blow by submitting estimated tax payments throughout the year. Use Form 1040-ES, Estimated Tax for Individuals to submit tax payments up to four times per year. For tax year 2017, you can submit payments on April 18, June 15, September 15, and January 16, 2018.
Most states also allow side-giggers and freelancers to submit estimated tax payments. To learn more about your state tax obligations, contact your local state tax office.
3. Adjust withholding from your day job
Don't pay more taxes than you have to. If a full-time employer is already withholding taxes from your paycheck, use the IRS Withholding Calculator to adjust how much is taken out. It has been estimated that 75 percent of Americans pay too much in taxes throughout the year. The calculator will provide you suggestions to adjust your withholding so that you meet your tax liability and keep the most out of your day job paychecks.
4. Hire an accountant
Using Schedule C from Form 1040 is a great way to reduce your taxable income, but is also a way to increase your chances of receiving an audit from the IRS. Individuals using Schedule C are more likely than corporations to get an audit. If you're planning to include a very long list of deductions, paying a professional will be worth your while to hedge against a potential audit. You can deduct what your accountant charges you as a business expense, after all.