Since losing
her job in advertising during the financial crisis, Dina Scherer has spent her
days helping women cultivate their own personal styles — finding flattering
color palettes, editing closets and taking customers on shopping excursions.
As a one-woman enterprise, she
can be considered a card-carrying member of the so-called gig economy,
receiving about half her client leads through Thumbtack, an online marketplace that connects consumers with
an array of service providers, whether wedding photographers, music teachers,
plumbers or organic cleaning services.
But there’s a reason the gig economy is also known as
the 1099 economy, with the number a reference to the tax form issued to
independent contractors: Workers in such arrangements are not employees of any
company, and the onus is on them to run what are essentially their own
businesses, even if the business is simply renting a room through Airbnb or
providing rides through Lyft or Uber.
All
independent contractors are responsible for handling their own taxes, keeping
track of their potentially deductible expenses and familiarizing themselves
with the requisite tax forms, all in time to send the forms to the federal
government by April 15. (This year, it’s April 18.)
“It was intimidating” at
first, said Mrs. Scherer, who runs her image and styling agency, Modnitsa Atelier, out of a WeWork shared office space in
downtown Manhattan. Now, though, she has her income and expense tracking system
down to a science, and consults an accountant come tax season.
There has been a lot of debate about
how online platforms have changed the nature of work. In some cases,
on-demand companies have been harshly criticized for making employerlike
demands on workers but denying them basic benefits and protections.
In January, Lyft, the
ride-hailing company, settled a lawsuit brought in 2013 by
drivers in California who sought to be recognized as full-time employees.
Though Lyft agreed to pay $12.25 million, its drivers remained classified as
contractors.
But the gig economy goes well
beyond providing rides on demand. For entrepreneurs, online marketplaces like
TaskRabbit, Thumbtack or Etsy have become another avenue to generate leads for
their own businesses. Then, there’s the chance for everyone to become a
hotelier.
“While more Americans are
turning to this kind of gig economy, they do face new and more complicated tax
requirements,” said Kathy Pickering, executive director of the Tax Institute at
H&R Block.
Where to begin? Here are
several requirements the self-employed need to think about, particularly during
tax season:
Reporting income Independent
contractors who haven’t set up any formal business structure (or who have, as a
single-member limited liability company) should report their income through the
traditional tax return, Form 1040. They will also typically use a Schedule C,
which lists income and expenses, or perhaps a Schedule E, when collecting real
estate income.
People running multiple
businesses — say, selling photo prints on Etsy while driving for Uber — would
need to keep track of all income and expenses separately, using dedicated
Schedule C’s for each. There may be state and local tax forms as well.
Generally speaking, payments
received directly from customers need to be tracked and reported when filing
the tax return. But contractors working through a platform like Uber or Lyft, for instance, may be issued a 1099-MISC (which is required when income
generated exceeds $600; it is also reported to the I.R.S.). They may
also be issued a 1099-K, which
tracks income paid through credit- and debit-card payment networks. That all
needs to be reported as well.
“One of the most common errors
that gets made is people forget or miss reporting all of their income,” Ms.
Pickering said. Independent contractors, she said, should track all income on
their own, since some may be reported via 1099s and other portions may not.
Many on-demand companies send annual earnings reports, too.
Self-employment taxes Employees
generally split payroll taxes — which cover Social Security and Medicare and
are automatically deducted from paychecks — with their employers.
But independent contractors
who generate more than $400 in net profit are responsible for the entire
amount, known as self-employment taxes. “No one
shares that with you,” said Greg Rosica, a contributing author to the EY Tax
Guide 2016.
Expenses and deductions The
added taxes may feel burdensome, but self-employment income opens the doors to
a host of new deductions, as long as expenses are germane to the business.
“If you are doing things like
Uber or a rides program, you can take your gas, your carwash, your vehicle
licenses,” Ms. Pickering said. “That may not be obvious for someone getting
into this for the first time.”
But there are also several
broad categories of expenses that can apply to different businesses. People
working out of their homes, for instance, can take the home office deduction, as
long as the space is used “regularly and exclusively” for business purposes. If
that’s the case, you can deduct $5 a square foot of dedicated office space, up
to a maximum of $1,500. Alternatively, a more complicated calculation, based on
actual expenses, could yield a greater home office deduction.
Phone lines and computers may
also be deductible, separate from the home office expense, but if the time is
split between personal and business use, that needs to be documented. “The
I.R.S. won’t take your guess,” said Mark Luscombe, principal
tax analyst at Wolters Kluwer.
“These things should be
contemporaneous. They don’t look kindly on you if you create records at the
time of the audit.”
Transportation expenses — say,
to meet customers — may also be deductible and can be accounted for in a couple
of ways: When driving, you can either take the standard mileage deduction or actual expenses to operate the vehicle
(lease payments, insurance, gas, oil) based on the ratio
of business to personal use. Track both, then take the larger deduction.
Individuals who use their
vehicles more than half the time for business may be eligible to deduct up to
$25,000 of the cost, as long the vehicle meets certain specifications. “That is
a great one for Uber and Lyft drivers, but it also goes for anyone with their
own business,” said Lisa Greene-Lewis, a certified public accountant at
TurboTax.
Health Insurance As
part of the Affordable Care Act, individuals are required to have health insurance, unless
they qualify for one of the exemptions. Self-employed people can
deduct their health care premiums, as long as they buy the insurance through
their business, while contributions to tax-advantaged retirement accounts, like
traditional I.R.A.s and SEP I.R.A.s — may also be deductible.
Estimated tax payments Many
self-employed people may need to make quarterly estimated tax payments during the tax year if they
expect to owe more than $1,000 in federal taxes.
Rental income People
who rent part or all of their homes for generally no more than 14 days — say,
for just a few lucrative holiday weekends — aren’t required to report the
income (and can’t deduct any expenses). But anyone who is renting a space for a
longer stretch must generally report that income, along with expenses, on either
a Schedule C or Schedule E of the tax return.
There’s quite a bit that can
be deducted, items as varied as advertising and cleaning bills, property
insurance, repairs and fees paid to agencies like Airbnb.
How much you can claim depends
on how many days your home was rented, versus the time it was used personally.
If, say, a beach cottage was available for rent all year, even thought it
wasn’t rented the entire time, all allowable expenses are deductible. But if it
was rented for 85 days and you used it for 15 days, you can typically deduct 85
percent of expenses, according to EY, which wrote a guide on rental property
income for Airbnb.
If you’re renting one room in
an apartment, one of two methods can be used to calculate how to divide up the
expenses: Base the percentage either on the number of rooms in your home or on
square footage.
State income taxes and perhaps
even local taxes may be owed as well, so be sure to check with those
authorities.
Tools Airbnb, Lyft, Uber and
others are working with tax and software firms to provide educational materials
for their contractors, as well as discounts and tools.
QuickBooks Self-Employed, an
accounting program and app, recently introduced a new automatic
mileage-tracking feature. And Xero Tax Touch is an app
that helps on-demand workers keep track of their incomes and expenses on the
go. The information can be transferred to a Schedule C at the end of the year.
Mrs. Scherer, however, uses an
old-fashioned spreadsheet, which helps her categorize expenses. It’s all easy
to track, since she uses a dedicated credit card and checking account.
But her advice to new
contractors? “If you are really fresh and don’t know anything, track
everything,” she said. “You’d be
surprised what’s deductible.”
No comments:
Post a Comment