It’s almost tax time!
With so many changes taking place the past year, understanding the tax deductions for gig workers that may help offset costs is key. Let’s face it – gig workers have taken over in a major way – even if you have a full-time job. If you weren’t aware, any income earned from a gig worker is taxable. The IRS considers you a business regardless of what type of gig it is.
While being a lucrative gig worker sounds nice, there are some caveats – taxes. Taxes must be paid on that money, but there are a few ways to get a few breaks.
Most gig workers just getting started always ask, “Do I have to pay taxes on a job I do part-time, or temporarily?” The answer is yes. If you are generating income whether it’s cash, goods, property, or cryptocurrency, you must report it.
The IRS is very specific about what gig work is to alleviate confusion. Here are some examples directly from the IRS website:
• Renting out property or a part of the property
• Selling merchandise online
• Driving rideshare
• Renting equipment
• Running errands or doing work for money
• Providing professional or creative services
• Freelance work
If you host a digital platform that helps people find these gig services, this is also classified under the main umbrella.
You may have to pay taxes four times a year – April 15, June 15, September 15, and January 15. You’ll have to file a Schedule C and report as a sole proprietor. You’ll also likely have to file Schedule SE for those Medicare and Social Security taxes you didn’t pay throughout the year.
It can be difficult trying to figure out what can be claimed as a deduction for a gig worker and what cannot. A good rule of thumb to follow is knowing the difference between what types of expenses are ordinary and what are necessary.
What’s the difference?
• Ordinary expenses can be considered regular expenses that are needed to keep the business running
• Necessary expenses can be considered as those that support the regular expenses and make the job easier
For instance, if you are an artist, paints and colored pencils may be an ordinary expense, but getting a special holder that organizes everything in one place can be considered necessary. While the case is not required, it can be deducted because it’s helping you do your job, therefore helping the business.
Tax Deductions for Gig Workers
With so many people working from home, there are a ton of deductions you may be able to take. Let’s start with the basics. If you’re self-employed and work from home, you are allowed a home office deduction. You must use this space just for work and on a regular basis. That means it should not be a community space that everyone uses or someplace you use while working and then convert it back to its original intent.
There are ways to calculate this deduction:
Multiply the square feet of the space (up to 300 feet) by $5. You can take a deduction up to $1,500.
Calculate how much of your home is used for your business and prorate the other expenses like insurance (homeowners or renters), utilities, and taxes on the property.
As a gig worker, you’re also entitled to deduct anything related to helping you do your job. That includes:
If you have expenses related to travel such as rental car fees, airline or bus fees, and any other expenses related to travel for business such as hotel, parking fees, if you had to purchase materials related to the travel, purchase clothing related to the travel, etc., you can deduct them. This also includes mileage. When using your car for travel, it’s important to keep a log of the mileage when leaving your destination, when you arrive and returning.
If you aren’t healthy, you can’t work. If you have a health insurance policy that you pay for, this may be a deductible expense. Consider it a health plan that you may have had if you were working for an employer. The difference is, you’re working for yourself. This deduction doesn’t stop at health insurance. If you have a business insurance policy, it applies in this area too.
• Business meals
Meals related to travel are deductible, but if you have meals related to a conference, or you have a business meal expense after meeting with a client, this is deductible.
• Office supplies
Whatever you purchase to help your business run effectively related to its administration is deductible. That means, paper, pens, pencils, software, and other expenses that help the general operation. If you have postage expenses, deduct them. You may have purchased some office supplies that you haven’t used yet, but you can deduct them in the year you purchased them.
Any equipment needed to run your business should be deductible. Computers, cameras, and other equipment needed to perform your duties are classified as a business expense.
• Phone expenses
If you have dedicated phone lines for your business, they can be classified as a business expense. Make sure these are not personal lines you also use for business. This also includes internet expenses directly related to your business.
• Car expenses
If you are using your vehicle or have a business vehicle, any upkeep related to the vehicle is deductible. This includes tires, oil changes, car washes, tolls, garage rent, insurance, registration fees, and any payments on a lease. If you use your vehicle to drive to meet clients and make pickups, the wear and tear can be written off.
• Professional dues
If you are part of a professional association or subscription service, these monthly, quarterly, or yearly fees are deductible as they are directly related to your profession and your professional development.
• Professional fees
Do you pay a yearly fee to keep your license up to date? What about your state registration? These are all deductible. Additionally, if you pay an accountant or attorney as part of your team that keeps your business going, these fees are deductible.
• Training and education expenses
This is an area that is often overlooked by many gig workers. If you paid for a course or bought any materials to help you learn how to do something directly related to your work, this is deductible. With so much information online and a lot of people turning to online venues to assist them, it’s easy to miss these types of deductions.
• Depreciation of equipment and property
Depending on the type of work you do, you may have major equipment expenses. Every year, that expense depreciates. The depreciated value is deductible and helps offset usage and eventual loss.
• Credit card and loan interest
If you have accruing interest on business-related expenses, these can be written off on your business credit card or your personal credit card if the purchase was business-related.
• Start-up costs
You may be eligible to deduct any costs incurred for starting your gig. This means any advertising, travel, and consulting. These costs may be up to $5,000 for start-up and $5,000 for organizational costs.
Any advertising costs you incur getting the word out is deductible. That means if you’re doing flyers and mailers, printing and postage are deductible. If you’re doing social media advertising, you can deduct these expenses as well. If you participate in a tradeshow, those expenses can be viewed as advertising.
A “quiet as it’s kept” secret that many gig workers don’t know about is the Individual Retirement Plan (IRA) deduction. As a gig worker, this is important because you can set up an individual 401(k) plan, and could have contributions up to $19,500 in 2021 as a deferral of that 401 (k), and 25% of net income.
While these are eligible deductions, you must make sure they fall under Qualified Business Income (QBI). This is “the net amount of qualified items of gain, income, loss, and deduction as it relates to a business or trade.” This does not include dividends, capital gains or losses, interest income, income earned from outside of the U.S., and certain payments made to shareholders or partners.
There are certain qualifications to meet to qualify for the QBI. Speaking with an accountant can help determine if you qualify and can get all the tax deductions for gig workers that apply to you. Maintaining accurate records can make things easier for a bookkeeper or accountant to take a look and find additional deductions and tax savings for you.
These deductions should give you some insight and give you a headstart on getting your financials in order for tax time.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.