Tax tips for the Gig Economy Businesses and Workers
Many people have turned to gig work due to the increase in reduced work hours, furloughs, and job loss caused by the coronavirus pandemic. Unemployment reached a record high in April 2020 of 14.7%. The unemployment rate fell to 8.4% in August 2020. The gig economy is booming. According to GigSmart gig work is on the rise, increasing up 25% since March. They found an increased demand for warehouse labor, moving van driver, laborer, packer, and loader services. Additionally, other reports have stated that there is an increase in white-collar workers entering the gig economy.
The gig economy, also called sharing economy or access economy, is an activity where people earn income providing on-demand work, services or goods. Such as but not limited to the following activities:
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Sell goods online
- Rent equipment
- Provide creative or professional services
- Provide other temporary, on-demand or freelance work
Gig work is usually found through apps and digital platforms, like Uber and Airbnb. These businesses match workers’ services or goods with customers via apps or websites. They provide access to:
- Ridesharing services
- Delivery services
- Crafts and handmade item marketplaces
- On-demand labor and repair services
- Property and space rentals
Tax Considerations
If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides or other goods or services, they may be part of the sharing or gig worker economy. If so, there are several things you should keep in mind. Income from these sources is taxable, regardless of whether an individual receives information returns. You must report income earned from the gig economy on a tax return, even if the income is:
- From part-time, temporary or side work
- Not reported on an information return form, like Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement.
- Paid in any form, including cash, property, goods, or virtual currency
Worker Classification
While providing gig economy services, the taxpayer must be correctly classified. This means the business or the taxpayer must determine whether the individual providing the services is an employee or an independent contractor. Businesses look at the following factors that provide evidence of the degree of control and independence to determine a worker’s classification:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Independent contractors are considered self-employed business owners by the IRS. As a business owner, you are entitled to certain deductions (subject to special rules and limits). Deductions reduce the amount of income that is subject to tax. You might also be able to deduct expenses directly related to enhancements made exclusively for the comfort of your guests. For instance, if you rent out a room in your apartment through Airbnb, you might also be able to deduct expenses directly related to enhancements made exclusively for the comfort of your guests. Such as amounts you spend on window treatments, linens, or even a bed, could be deductible. If you drive for Uber and use your personal vehicle you may be able to take the standard business mileage rate, which is 57.5 cents per mile for 2020.
Special Tax Rules for Renting out your Home
Special rules generally apply if a taxpayer rents out his home, apartment, or other dwelling but also lives in it during the year – this residential rental income may be taxable. If you rent your home out for 15 days or more during a calendar year and you receive rental income for the use of a house or an apartment, including a vacation home, that rental income must be reported on your return in most cases. You may deduct certain expenses such as mortgage interest, real estate taxes, maintenance, utilities, and insurance and depreciation, which reduce the amount of rental income that is subject to tax. If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won’t be able to deduct your rental expense in excess of the gross rental income limitation.
Generally, if you rent out your home for less than 15 days, then you do not need to report any of the rental income and you don’t deduct any expenses as rental expenses. For more information about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxpayers can also use the Interactive Tax Assistant Tool, Is My Residential Rental Income Taxable, and/or Are My Expenses Deductible? to determine if their residential rental income is taxable. Click here to try the tool and see IRS Publication.
Gig Economy Tax Center
The Internal Revenue Service launched a new Gig Economy Tax Center on IRS.gov to help people in this growing area meet their tax obligations. The Gig Economy Tax Center streamlines various resources, making it easier for taxpayers to find information about the tax implications for the companies that provide the services and the individuals who perform them.
