“Gig economy” tax tips… for taxpayers finalizing their 2019 tax returns.
The Covid-19 epidemic has had a profound effect on our economy. That is an understatement!
Where did the time go when we were having so much fun ….being locked up??
During this time many of us found new ways to pass the time and make a little extra cash $$.
Some of these new acquired skills may have included working from our NEW …“Home Office”.
A lot of individuals developed or expanded their digital platform “Apps” or earned money from unconventional sources. ( Developing web Consulting or Zoom applications )
It is easy to ‘forget’ some of the basic tax rules.
So, buckle you if you have not addressed this new source of income for 2020 because it may very well be taxable.
Several of these new income sources continue to be overlooked because they seldom come from conventional sources or you never receive a Form 1099…. Arggggggggggg!
One new income source is from what the IRS calls “The gig economy”.
This is getting increased scrutiny by the IRS…so watch out!
This is also called “a sharing or access economy”.
In other words, it is activity where taxpayers earn income providing on-demand work, services, or goods. Many times, it can be from a digital platform like an app or website.
So, if you have developed a “great APP” idea that has taken off in your basement…listen up!
Here are the rules…
Income from these sources is taxable, regardless of whether an individual receives information returns. ( Form 1099’s)
This is true even if the work is full-time, part-time or if an individual is paid in cash.
- Taxpayers may also be required to make quarterly estimated income tax payments and pay their share of Social Security, Medicare, or Medicaid taxes.
While providing gig economy services, it is important that the taxpayer is correctly classified.
- This means the business, or the taxpayer must determine whether the individual providing the services is an employee or independent contractor.
- Taxpayers can use the ‘worker classification” page on IRS.gov to see how they are classified.
- Independent contractors may be able to deduct business expenses, depending on tax limits and rules.
- It is important for taxpayers to keep records of their business expenses.
Since income from the “gig economy”…. is taxable, it is important that taxpayers remember to pay the right amount of taxes throughout the year to avoid owing when they file.
- An employer typically withholds income taxes from their employees’ pay to help cover income taxes their employees owe.
- Gig economy workers who are not considered employees have two ways to cover their income taxes:
- Submit a new from W-4 to their employer to have more income taxes withheld from their paycheck if they have another job as an employee.
- Make quarterly estimated income taxes to help pay their income taxes throughout the year, including self-employment tax.
For more information check out this IRS tax Tip 2020-75 at the IRS website
So, what about… ‘Start up Business”…where do they fit in to the “Gig Economy”…??
If you are just starting up your “gig’ business …remember you will need to keep great records to verify the startup expenses( Section 195) and establish it was a “true trade or Business” that will offset some of that “gig income”.
Here is a case from the AICPA “The Tax Advisor” that speaks to that issue along with another great article of “Recent developments in individual taxation” published in June 2020.
Sec. 195: Startup expenditures
At issue in the Smith case (T.C. Summary Opinion 2019-12) was whether a taxpayer who started a vegan food export business had improperly deducted expenses on Schedule C that were Sec. 195 startup expenditures.
The Tax Court explained that, in determining whether an activity has become an active trade or business, it relies on cases addressing whether a taxpayer is engaged in a trade or business under Sec. 162.
Here, the taxpayer had completed his business plan in the previous tax year and had obtained suppliers of vegan products and entered into a license agreement for distribution exclusivity with one supplier.
The taxpayer was actively marketing these products in various foreign countries.
The court ruled that the taxpayer’s activities were not mere research into a potential business and were not subject to Sec. 195 limitations.
Here is the IRS site for “Starting a Business.”
Hope this helps!