If you want to make extra cash on the side, there are plenty of options out there from Airbnb to Lyft to Etsy. You’ve probably heard this referred to as the gig, sharing, or on-demand economy. Whatever you want to call it, if you earn any of your income this way, you have to think about taxes. Here’s what you need to know.
Even if You Didn’t Earn Much, You (Probably) Have to Pay
No matter what kind of work you do, the IRS expects you to pay your taxes. When you earn a salary at a standard 9 to 5 job, your employer withholds these taxes for you. When you earn money as a freelancer or independent contractor, like you would if you signed up as a Lyft driver, for example, the money you earn hasn’t been taxed yet. It’s up to you to make sure you pay the IRS.
This means if you made any money from a side business, job, or gig, chances are, you need to report it as earned income (yes, even cash tips). The rules get a little tricky, though.
If you earn over a certain threshold for the year, the employer or company is supposed to send you a 1099-MISC or 1099-K form to help you file your taxes. 1099-MISC are typically meant for companies who hire workers as freelancers, and 1099-Ks are for third party companies like eBay, Paypal, Uber, etc. The threshold for 1099-MISCs is anything over $599 and for 1099-Ks, it’s anything over $20,000 or more than 200 transactions within the tax year.
However, just because you earn less than these thresholds or the company doesn’t send you a form doesn’t mean you’re off the hook for taxes. According to the IRS, it’s up to you to keep track of what you made and report it on your return.
Renting your house works a little differently, though. Let’s say you rented out a room or home with a service like Airbnb. If you rented it out for fewer than 15 days, you actually don’t have to report the income on your tax return. (Of course, you can’t deduct expenses related to this income, either, like housekeeping or cleaning supplies.)
Not everyone follows the rules, of course. Some workers prefer being paid in cash precisely because they can fudge their tax return. Keep in mind, though, the IRS expects you to report any and all income you earn, even if it’s from a side gig and even if it’s cash.
You Can Deduct Business Expenses
On the plus side, you can deduct certain expenses related to your business.
Let’s say you’re an Uber or Lyft driver. You can deduct the use of your car as a business expense. You have two options for doing this: You can either deduct the actual expenses for using your car (like gas, maintenance, lease payments) or you can take the IRS standard mileage deduction, which is 54 cents per mile (for business use.)
Most drivers probably use their cars for both ride-sharing and personal use, though, so it’s worth pointing out that you can only deduct the expenses that apply to business use. It can be tricky to sort out expenses in this case, but good tax prep tools like TurboTax and TaxAct walk you through them and a good tax professional can help, too. TurboTax lists a few other deductions drivers can take:
Commissions you pay to the ride-share company are a business expense, as is any cost you may have to pay for technology installed in your car. Other tax deductions include:
- Car washes and interior cleaning
- Water, gum or snacks for passengers
- Tolls and parking fees
In addition, ride-sharing companies typically require use of a smartphone.
- The portion of your mobile phone expenses attributable to your ride-share work can be used to reduce your self-employment income.
- For simplicity’s sake, it may make sense to have a dedicated phone for work.
If you rent a room on Airbnb, you can deduct any “ordinary and necessary expenses for managing, conserving and maintaining your rental property,” according to the IRS. This might include expenses like mortgage interest, property tax, depreciation, repairs, cleaning fees, and insurance. You can also deduct Airbnb fees (as well as eBay and Paypal fees) as advertising expenses or bank service charges.
If you only rent out a room or a portion of the home you actually live in, however, you won’t be able to deduct 100% of your expenses. Again, you’ll have to divvy it up between business and personal use and a good tax preparer or tax software program will walk you through this.
If you freelance in any other capacity, your deductions will vary depending on the business, but don’t forget to take your home office deduction if you work from home at all. Here’s another complicated rule to keep in mind: you don’t want to double-deduct. TurboTax explains how this works:
For example, you’re a freelance graphic designer with a home office, but you also rent your apartment through Airbnb for two months in the summer. For that time period, the rent on the apartment is a deductible expense for your Airbnb operation, not your activities as a graphic designer.
Otherwise, make sure to squeeze in all the deductions you can. 99Deductions can help. Just enter what kind of work you do or service you offer, and the tool populates a whole list of deductions you can take related to your business.
You Might Need to Pay Quarterly Taxes
Everyone has to pay taxes throughout the year. Again, when you have a standard, full-time job, your employer makes these payments for you. It’s called employee withholding. When you make money from a company, business, or individual that doesn’t withhold taxes, it’s up to you to make it happen.
Throughout the year, freelancers and independent contractors pay estimated quarterly taxes, which are pretty much what they sound like: an estimated tax payment every 15th of April, June, September, and January. If you don’t pay enough at the end of the tax year, not only will you owe the extra taxes, you’ll also have to pay a penalty.
On the other hand, if you also work full-time while earning cash as a freelancer on the side, you may not have to worry about making quarterly payments. The IRS explains:
If you also work as an employee, you can often avoid needing to make estimated tax payments by having more tax withheld from your paycheck. This may be a particularly attractive option if, for example, your sharing economy activity is merely a side job or part-time business. To do this, fill out a new Form W-4 and give it to your employer.
The IRS makes it easy to pay estimated quarterly taxes online, and this calculator can help you figure out how much you owe.
Finally, the IRS has a pretty detailed web page you might find useful, the Sharing Economy Tax Center. It covers all of the basics outlined here, plus some additional, detailed information for specific situations.
Illustration by: Sam Woolley