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How to file taxes in a part-time economy

Reni Mimura, a waitress at the Maid Cafe New York, speaks with customers in New York November 20, 2013. REUTERS/Shannon Stapleton

The recession may have taken its toll on American households, but we are nothing if not a resourceful bunch. When full-time jobs were scarce, workers sucked it up and signed up for whatever part-time work they could find, in some cases cobbling together two or three temporary gigs to make ends meet.

Since the end of 2007, the number of out-of-work Americans who took up part-time jobs when they could not find full-time employment shot up by 4.3 million, a surge of more than 70%, according to a recent Brookings report.

And when even part-time work is hard to come by, there are always more creative ways of paying the bills. Hobbyists turn their pet projects into meaningful sources of income, college graduates learn the art of freelancing, and empty nesters rent out spare bedrooms.

Now that tax season is upon us, it can be challenging to figure out how to report these unconventional sources of income. Here are a few tips to help you keep the IRS off your tail:

If you’re freelancing on the side and turning a profit

Freelancers and independent contractors — all 42 million of them — make up one-third of the U.S. workforce today and are on track to grow their ranks by another 10% by 2020.

“A lot of people start out with hobbies and then they start making money and it gets to a point where it’s to your advantage to treat it as a business,” says Kay Bell, senior tax editor for Bankrate.com.

When you’re running a one-man business, it can feel like the IRS has no claim to your hard-earned cash. But the last thing you want to do is try to cover up income earned through freelance work. Any client who has paid you more than $600 is obligated to report it via a 1099-MISC form to both you and the IRS,  which means there’s a small chance of skirting by Uncle Sam anyway.  

“Regardless of whether you get paid by cash or check or even PayPal, it’s considered taxable income,” Bell says. “At some point if you’re making a substantial amount of money, they’re going to know.”

To start, get familiar with the Schedule C form, which is reserved for freelancers and other self-employed workers.  Any basic tax software will prompt you with a Schedule C as you go through the filing process. The upside of filing this way is that you’re also given the chance to deduct any justifiable work-related expense, like gas, equipment, and furniture for your home office, so long as it is exclusively used for work.

Where there’s an upside, of course, there’s always a downside. Once you’ve earned more than $400 in income from your side gig, you could face self-employment taxes, which are another version of payroll taxes used to cover Social Security and Medicare. The simplest way to stay on top of these taxes is to estimate how much you’ll owe ahead of time and send in payments throughout the year, using a calculator like this one.

If you’re renting out your bedrooms

Thanks to sites like AirBnB, it’s easier than ever to turn your spare bedroom into a cash machine. Homeowners in New York and New Jersey are renting out their pads to Super Bowl spectators for five-figure sums, and there are reports of quasi-landlords earning so much money through AirBnB that they can actually afford to live rent-free year-round.

But it’s important to know if and when you’ve crossed the line from being a part-time host to an illegal hotelier. Just last year, an AirBnB user was slapped with a $40,000 fine for violating New York City hotel regulations.

“Whether you rent long term or short term, you need to double check with your local government because they will have their own regulations about rentals,” says Bell.

Federal law regarding rental income is simple enough: If you’re renting out space in your home for more than 14 days a year, you could be subject to rental income taxes. You’d need to report your income earned on a Schedule E tax form. Sites like AirBnB have begun issuing proper tax forms to users, but don’t expect them to do all the legwork for you.

If you’re selling off big-ticket items like jewelry and cars

When you have a garage sale or sell an old car, the IRS considers those items personal property and taxes generally don’t apply. The reason is simple: You’re not actually making a profit, because you’re most likely selling that sofa or car for less than you paid for it.

“There are no tax implications for selling personal property when you don’t make a profit on it,” Bell says. “If you’re selling items on, say, eBay and you’re making a profit, you’re basically running a small business, then that’s [a different story].”

E-commerce sites don’t independently report income earnings for its users to the IRS, so the onus is on you to do so by filling out a 1099 form, which is good for reporting all kinds of miscellaneous income.

If you’re on the payroll at a part-time job

Often part-time employees earn too little to be required to file income taxes. But pay close attention to your paystub. If your employer has been deducting federal and state taxes from your pay, you could be due for a refund.

“If you’re working a short-term job or earn just a very small amount, you still want to go ahead and file [taxes] anyway,” Bell says. “That’s the only way you’re going to get that refund back.”
By law, there’s a three-year window to recover unclaimed tax refunds. For example, the last date to recover refunds for 2010 will be April 15, 2014.  If you miss the deadline, you can basically kiss your cash goodbye — it officially becomes property of the U.S. Treasury.  Certain exceptions apply for people who can prove they’ve experienced a mental or physical impairment.

When in doubt, don't hesitate to ask a professional tax preparer for helping sorting your taxes out. You can find certified public accountants via this search tool from the American Institute of CPAs.   

Have a question about your taxes? Send us an e-mail.

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