While many are not familiar with the term gig economy, most are familiar with some of its components. These include ride sharing such as Uber or Lyft, and Airbnb. In fact, according to the Federal Reserve, a full third of Americans are involved in the gig or “sharing” economy. With so many people involved it is important to understand both the obligations and opportunities with this new economy.
Like a business owner opening a store, those involved should understand that they are self-employed. As such, taxes must be paid. Like other businesses, there are unique opportunities for offsetting deductions. Below are some tips to help those in this economy avoid problems while minimizing tax liabilities.
- Don’t hide income. Even if the business is a small side business. Report all payments regardless of whether made in cash, goods, property or services. This includes tips. Failure to report it can have repercussions down the road. If unreported income is caught in future years and it exceeds reported income by 25%, the statute of limitations doubles.
- Always report large cash transactions. Federal law requires any deposit over $10,000 to be reported to the IRS by the bank. That requires paperwork to be completed. The original purpose was to combat money laundering. Those who accept credit cards should know that the merchant bank is required to report those transactions to the IRS annually.
- These kinds of businesses have “ordinary and necessary business expenses”. This is the IRS phrase for business expenses that are deductible from the gross income to determine profit or loss on the business which is part of the calculation of the Adjusted Gross Income (AGI). These are very powerful deductions. Which deductions to take greatly benefit from working with an experienced tax professional.
- Avoid estimated tax penalties. These penalties come from not making estimated tax payments. The income tax system is a “pay as you go” system. This means taxpayers who don’t have withholding from a job are expected to make quarterly payments. Failure to do so can incur penalties at tax time. To avoid the penalties, a business owner must pay at least 90% of the current year’s liability or 100% of the previous year’s liability. The percentage goes to 110% if the prior year’s AGI exceeds $150,000.
- Most importantly, keep good records. Recordkeeping is imperative. Good records show the revenue coming in and the expenses going out. During the year, these records can be used to determine the estimated tax payments discussed above. These records also are very useful in tax planning considerations when other business decisions are made and to gage profit during the year. At the end of the year, these records are the foundation for preparing the tax return. Record keeping is a daily requirement both for accuracy and for the records to be useful from day to day.
Engaging in a gig or sharing economy business can be very rewarding. While staying compliant with the law and following the tips I have listed may seem onerous, it doesn’t have to be. A professional advisor can set up an accounting system to facilitate recordkeeping and monitor the records and perform reconciliation and other tasks.
The gig or sharing economy is different from traditional businesses in many ways. But even with these differences, certain principles, rule and regulations that apply equally to both types of business. Taking some time to establish systems and procedures along with hiring the right advisors to provide the needed expertise allows the participant is this new and exciting economy to focus on what they do best.