Helping Clients Navigate the “Gig Economy”

             In our current economy, finding a standard 9-5 job is not as easy as in decades passed. Even when working a standard 9-5 job, many people still supplement their income with side jobs or “gigs”. Given the rise of technology, many of these jobs are done through the service of a telephone application, such as Uber or Lyft (among many, many others). With the rise of these apps and other “gig” websites, workers are learning that while the work may be there, the stand occupational benefits, such as federal income tax withholding, are not. This can lead to unexpected tax consequences when filing season arrives, but there are ways to combat and avoid such consequences which we will discuss.

              Work is work, right? Yes and No. Yes, when it comes to your efforts, but, no, when it comes to your taxes. There is large tax difference between working as an employee of a company and working as an independent contractor. An employee’s labor may be paid by the hour or they may receive a salary, while an independent contractor gets the amount that a particular gig pays. An employee will receive a W-2 for tax purposes but a contractor will receive a 1099 for each gig or company for whom gigs were performed. For example, a commercial landscaper will get a 1099 from each company for whom they provide landscaping services, while an Uber driver will get a single 1099 (or possibly 2 in the event of bonuses) for all the ridesharing that they provide. W-2s show the federal income tax withheld from the worker’s pay. It shows the social security tax and Medicare tax paid. If the W-2 worker is in a state with state income tax, there will likely be state income tax withheld as well. A 1099 indicates that “cash” or essentially the equivalent to cash, a check for the whole dollar amount, was paid out to the worker, therefore the worker is liable for all the taxes due. However, these taxes will not be due formally until the worker files their income taxes, subject to deadlines, fines and penalties.

              There are some benefits to being paid on a 1099. Primarily the ability to deduct work-related expenses will be the biggest boon in allowing the taxpayer to reduce their tax liability. Most work related expenses are deductible to some extent when the worker is paid on a 1099. The IRS provides clear rules as to which expenses are directly deducted and which expenses are required to be depreciated or amortized. Workers need to be very careful that the expenses that they deduct are, in fact, business expenses. Personal expenses are NEVER deductible as a business expense. Just because you go through the McDonald’s drive-thru in between Uber rideshares, that does not make the meal a work expense because the worker still has to eat otherwise. Work uniforms are deductible, but buying nice clothing to impress your clients is not deductible if you can wear it out on the street other times. The various expenses that a contractor has will directly reduce the net income of the business and will thereby directly reduce the amount of self-employment tax owed by the contractor.

               It’s not only self-employment that a worker is subjected to. First there is income tax. The federal income tax will be based on the worker’s taxable income. This is the total income beyond the employee’s standard (or itemized) deduction. There are credits to offset income tax such as child tax credit, educational credits, and more. These are non-refundable credits, meaning that they will only offset tax liability. If there is no regular income tax then these credits will potentially be useless. Non-refundable credits will not reduce self-employment tax which is levied after the standard income tax. Only refundable credits will offset self-employment tax. In some cases, like that of the Child Tax Credit, there is the additional Child Tax Credit which is “refundable” and will help reduce a taxpayer’s total tax liability. If a self-employed taxpayer has a high net income, they will likely have both income tax and self-employment tax.

               Most seasoned self-employed taxpayers are familiar with owing taxes come tax time. For new independent contractors, a tax balance due can come as quite a shock. Tax planning can help taxpayers reduce what they will owe at tax time through appropriate asset strategies and by making estimated tax payments. Making estimated tax payments through the tax year will allow the taxpayer to avoid penalties and fines for lack of appropriate taxes paid. Planning your tax work will also help ensure that the taxpayer files their taxes on time, every time.

               With the advent of DIY tax software, many people think that they are capable of filing their own taxes, and while many are, many more are not. Tax programs will let you claim inappropriate expenses and make impermissible tax claims in much the same way that a car will let you drive it off of a cliff. One way to prevent yourself from getting deep into a tax hole is by finding a trusted, competent tax professional to assist you in your tax filings. Tax professionals study tax code, tax law updates and are well-versed the software used to file your taxes. If you want to get the maximum refund allowable by law and you seek to (legally) pay as little as possible, find a tax professional in your area and know that you are making an investment in the safety of your tax matters.