Lyft, the popular ride-sharing service, is likely to go public within the next couple weeks. And yes, the deal is likely to be massive. From 2017 to 2018, revenues spiked by more than 100% to $2.2 billion.
Source: Shutterstock While this growth points to the dynamic change about how consumers look at car ownership, there is also something else at play: the growth in the so-called “gig economy” and the rise of “side gigs.” Companies like Lyft allow people to have flexible work schedules.
According to the company’s S-1 filing:
“Technology has enabled online platforms that provide workers with independent and flexible opportunities to generate income on a per-job basis, allowing them to earn money on their own schedules. 95% of net job growth from 2005 to 2015 was in the alternative work category, which includes independent contractors and freelancers. We believe that this trend will continue.”
While this is great, it also has led to some nagging issues. Perhaps one of the most notable is side gig taxes. Gig workers are essentially treated as small businesses and this means they have more responsibilities and requirements. Yet there is often little guidance from the platforms that pay them, which can mean there is a higher chance of getting in trouble with the IRS. Keep in mind that the agency has been devoting more resources to cracking down on side gig taxes.
So what are the steps you can take to stay out of trouble when it comes to side gig taxes but also get the tax benefits you’re entitled to? Well, let’s take a look:
Estimated Taxes for Your Side Gig
Many people who work in the gig economy also have regular jobs — hence the term side gig. But this can create a disconnect. After all, we have become accustomed to having income taxes, Social Security and Medicare withheld from our paychecks. Then when tax season rolls around, we expect a refund.
But things are much different with side gig taxes. The gig company will pay the gross amount of your compensation. In other words, you are required to handle your own withholding!
This process is called estimated taxes, which involves making four payments throughout the year (January 15, April 15, June 15 and September 15) when you owe at least $1,000. You’ll make these payments with Form 1040-ES.
What if you do not? The IRS will impose interest and penalties. However, if you earned a large amount from your side gig, it may be difficult to pay the side gig taxes owed (this could mean having to setup an installment plan with the IRS).
If anything, making estimated payments is a good way to help manage your personal cash flow.
Keep Track of Your Side Gig Income
Another gotcha is that the gig company may not even issue to you a tax document for the income you earned. The reason is that your compensation was likely paid through a debit or credit card. Because of this, there is only a filing required if there have been more than 200 transactions or the earnings are over $20,000.
Regardless, you still need to pay taxes on this. It is immaterial if there has been a filing or not.
But it could take awhile until the IRS catches on to this. And when it does, it could mean that you owe a substantial amount in taxes.
Use Tax Software to Help Maximize Your Benefits
So long as an expense has a legitimate business purpose, you can deduct it on your tax return. But of course, there are various rules to consider and you need to keep track of receipts and any relevant documentation.
The good news is that there are a variety of apps to help out, such as Intuit’s (NASDAQ:INTU) QuickBooks Self-Employed, which makes it easy to track mileage and expenses. You can even do your estimated payments and file your tax return.
Finally, the tax reform bill has provided a nice break for gig workers — that is, a 20% deduction for qualified business income. In fact, you can get this break even if you do not have a corporation.
Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
More From InvestorPlace
- 2 Toxic Pot Stocks You Should Avoid
- 7 Financial Stocks to Invest In Today
- 7 Single-Digit P/E Stocks With Massive Upside
- 5 Chip Stocks on the Rise