The gig economy has opened up several new ways for individuals to earn a living, either full-time or as a part-time hustle. This is a unique type of workforce environment in which people earn an income from temporary contracts and short-term engagements. It has been named as such because each job is in fact an individual gig. Uber drivers and Airbnb hosts are two of the most common examples of gig economy drivers.
With benefits ranging from flexible working hours to unlimited earning potential, more and more people are favoring the gig economy over the traditional 9 to 5 way of earning a living. Another big appeal to this way of life is that there are no restrictions based on age, sex or any other factor.
Anybody can work in any capacity as long as you are willing to do the job and deliver what you are being paid for. Many full-time workers are also making money in this economy through various side hustles. One of the biggest draws of the gig economy is the substantial tax break that independent contractors enjoy.
Breakdown Of Tax Benefits For The Gig Economy
For the purpose of income taxes, gig workers are considered as sole proprietors of their business. As with most other types of small business, your tax liability is calculated on your annual income, minus the qualifying deductions. Below are some of the deductions you can claim as a gig economy worker. Keep in mind that because there are several different business models within the gig economy, all of the deductions may not be applicable to you. The deductions that you qualify for will depend on your unique business model.
- Office equipment and supplies – Expenses related to office equipment and supplies are unavoidable regardless of what type of business you are running. The good news is you can claim for all of these office costs as business expenses. For example, you can claim a deduction for any laptop, desktop, smartphone, printer, and office consumables that you purchase during the financial year.
- Rent or home office deduction – All business owners need a space to run their business from and the rent of this space qualifies as a deductible business expense. If you rent an office space, you can claim a deduction on the rent. You can also claim a home office deduction if you can show that you use a room in your home exclusively for running your gig economy business. Your home office is not considered exclusive and does not qualify for deductions if it doubles up for any other purpose.
- Utilities – There are several expenses involved with running an office and all of these are deductible. You can claim deductions on your electricity, phone, internet, water and heating bills.
- Travel Expenses – All travel costs related to your work qualify as business expenses and can be claimed. Travel expenses include transportation tickets and hotel stay. If you drive your own car for business, you can also claim deductions on the cost of petrol and vehicle insurance as well as maintenance costs.
- Health insurance – As an independent contractor, you most likely pay for your own health insurance. Depending on what you qualify for, you may be able to claim a deduction on some or all of your health insurance premiums.
- Gig marketplace fees – Most gig economy workers find jobs through some type of online or offline marketplace. All of these gig marketplaces charge users a fee to use their platform. These fees may be in the form of a monthly subscription or as a commission based on the income earned. All market fees that you pay in a year can be claimed as expenses for that year.
- Payment processing fees & bank charges – Some banks and marketplaces impose charges when you accept certain payment methods. You do not have to pay tax on these payment processing charge amounts. They can be listed as business expenses.
- Exchange rate fees – If the payment for your services was made in a foreign currency and then converted into US dollars, the exchange rate fees can be claimed as an expense.
- Software and subscriptions – Any expenses that go towards purchasing some type of business-related software or subscriptions can be claimed as expenses. This includes the cost of specialized training, professional membership fees, or fees for using certain software to enhance your business.
- Charitable donations – Yes, you can claim a deduction on all charitable donations you make during that particular tax filing year.
Special Deductions for Airbnb Hosts
If you are an Airbnb host, you may also be eligible to claim deductions for cleaning and maintenance. This is limited to the cost of cleaning the room only during the days that it was rented. The cost of cleaning during the time when the room was not rented out is not considered as qualified business income.
Your home insurance expenses and interest on your home loan also qualify for deduction, with a stipulation. These must be divided as shared expenses.
Tips For Maximizing Your Return
If there is one downside to being a gig economy worker is having to file and pay taxes. This is made all the more tedious by the fact that your income varies widely from one month to the next. This is unlike working in a traditional environment where employees receive a steady paycheck for the same amount every month and the tax is deducted at source. However, there are ways you can make this easier on yourself so you are not struggling and stressed every year when it’s time to file your tax returns.
Keep these 3 simple tips in mind to make tax season easier for you while also helping you maximize your tax returns:
1. Keep meticulous records – Because there is so much scope for fudging records, gig economy workers are often audited. Anyone who has been through this grueling process will tell you that it’s no fun at all, especially if you have been careless about keeping records. Make it a habit to save all your records from the beginning and you will sail through any audit, no matter how rigorous. This includes records of income and receipts for all business-related expenses. If you are an Uber driver, you will also want to keep records of all your mileage and other vehicle expenses.
2. File and pay your taxes on time – The IRS is known for imposing stiff penalties on late taxes. One of the biggest things you can do to maximize your return is to file and pay your taxes on time every time so you avoid those dreaded late penalties. Sometimes, you may find yourself in a position where you need to file for an extension. Even then, it helps to estimate your taxable income for the year, and pay the taxes by the original due date.
3. Make quarterly payments – Making quarterly payments is essential to avoid penalties. This involves making estimated advance payments three times a year. Before making the fourth and last payment, you calculate the exact amount of tax due and make that payment accordingly.
Should You Hire A Tax Professional?
Yes, absolutely! As a gig economy worker, you are better off spending your time making money and leaving the tax calculations to a professional. Tax professionals stay updated on the latest tax laws. They are well versed with the current tax rate and will make sure that your tax rate is calculated correctly. Also, you get the maximum benefit by way of tax breaks that can help lower your tax bill substantially.