If you started a new side hustle last year, such as pet-sitting through a service like DogVacay or renting out your spare bedroom on Airbnb, filing your taxes could be more complicated than you might think.
A lot of people in the gig economy "don't think of themselves as running a small business, which is actually what they are doing," says Peter Burridge, president and chief commercial officer of Hyperwallet, a payout platform for independent workers.
This attitude can lead to unpleasant surprises come tax-filing season, because unlike employees, freelancers, consultants and others who participate in the gig economy don't have money withheld for taxes. The Internal Revenue Service requires them to pay both the employer and employees' portion of Social Security and Medicare taxes. For 2016, the self-employment tax rate is 15.3 percent on the first $118,500 of your net income.
If you earned extra income from side projects such as driving for Uber or Lyft, selling your handiwork on Etsy or hiring out your services on a freelance basis, here's a general overview of what you need to know.
Declare all income. Make sure you're tracking how much money you make from side hustles so you can properly declare it on an IRS form called Schedule C (or for rental income and expenses, Schedule E). If you're working through a gig economy app such as TaskRabbit, Fiverr or another on-demand tool, that platform will likely track that income for you. If you're piecing together money from several gigs, make sure you track your income.
If you earn more than $600 in a calendar year from one company as an independent contractor, you should be issued a 1099 tax form from the company where you provided a specified service. Some companies will voluntarily send 1099 forms to all contractors, even if they earn below this threshold.
The IRS also receives a copy of your 1099, so failing to declare that income will only cause future headaches. The IRS will also charge you penalties and interest if it receives a 1099 for income you did not declare, cautions Eric J. Nisall, an accountant and founder of AccountLancer, a tax service for the freelance community. "It doesn't matter if you get a 1099 or not," he says. "Even if you earned a penny of income, anything outside of selling your personal items is called earned income and it's all taxable," he adds.
Pay quarterly estimated taxes to prevent bill shock. For earned income that isn't subject to tax withholding, Nisall recommends paying quarterly estimated taxes rather than waiting until April 18. "It's easier to pay in four small chunks than it is to come up with a huge lump sum," he says.
Failing to pay quarterly taxes can also trigger penalties and interest. If you haven't already paid quarterly estimates and realize you should have, "pay as much of your estimate as you can as soon as you can to try and minimize any penalties [or] interest," Nisall says.
To make quarterly tax payments, you can mail in checks with the IRS form 1040-ES or make payments via the IRS website. For 2017, the deadlines are April 18, June 15, Sept. 15 and Jan. 16.
Track expenses to lower your tax liability. Since side hustlers are essentially micro-entrepreneurs, they can deduct qualified business expenses to offset their tax bill. Eligible expenses vary depending on the nature of your business and how aggressive you or your accountant wants to be about taking deductions.
For instance, if you're driving for a rideshare service such as Uber or Lyft, you can deduct your mileage, provided you keep a detailed log. Using GPS, the app will likely track the miles you drive while transporting passengers. However, Tai Stewart, a writer, former Uber driver and founder of Saidia Financial Solutions, a Houston-based accounting firm that caters to entrepreneurs, recommends also tracking and deducting miles between rides to pick up passengers so you don't miss out on deductible miles.
For 2016, the standard business mileage rate was 54 cents. Depending on which method gives you a higher deduction, you can use the standard mileage rate or deduct expenses such as car registration, depreciation and maintenance. However, you cannot take both deductions.
Airbnb hosts, on the other hand, use a Schedule E form to report rental income and expenses. "Schedule E is going to ask you how many days [the rental] was available and how many days it was actually rented out," Stewart says. Hosts might want to track and deduct expenses such as linens, cleaning supplies and a portion of Wi-Fi if they're providing it to guests. "If you're using it for personal use as well throughout the year, there's different rules for [a space that's part vacation rental, part personal]," Stewart adds.
Ideally, you'd maintain separate bank accounts for business and personal use to avoid blurring the lines between business and personal expenses. "A lot of times people are not seeing it truly as a business, so they may end up intermingling business expenses with personal expenses, which makes it harder to track," Stewart says. In the event of an audit, the IRS prefers to see a clear distinction. For this reason, some Uber drivers maintain a personal and business vehicle, she explains.
Still, "any money that you take from the business is not a salary and is not an expense to the business [unless you're set up as an S corporation]," Nisall says. Some bookkeeping tools aren't intuitive enough to make the distinction between different business structures, which can cause side hustlers to erroneously take this deduction, he adds.
Depending on your specific situation, your taxes may have extra complications. So, when in doubt, consult a tax professional about what expenses are deductible, when to pay quarterly taxes and how to properly file your taxes as a side hustler.
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