If it seems there are more freelancers in the marketplace now, that’s because there are. In the past twenty years, the “gig economy” has grown by 27% more than traditional employment. Whether you work a side hustle to a salaried job, or put together a full-time income with a variety of gigs, there are taxes and tax deductions that can affect your finances in a big way. Here’s a rundown of some tax issues associated with the Gig Economy.
1. Self-Employment Tax
If you have full-time work, Medicare and Social Security taxes must be deducted from paycheck. Gig-economy workers must pay those taxes for themselves, through the Self-Employment Tax. The required rates are 12.4% educated for Social Security and 2.9% for Medicare. These taxes are high because contractors and freelancers must pay the employer and employee portions for both Social Security and Medicare.
2. Income Tax
You must still pay income taxes if your net earnings from self-employment are more than $400 in any given year. The keyword here is net, so be sure to accurately document your earnings and expenses, and make the eligible deductions from your taxable income.
3. Home Office Deductions
Whether you rent or own a home, you can deduct expenses associated with running a business from there. The IRS states that the space must be your main place of business, and must be exclusively dedicated to your work (so if you typically work on your kitchen table, you’re not eligible to deduct the cost of the kitchen, assuming you also cook there). You need to figure out the percentage of space you use to determine the size of your deduction.
A home office is not just a deduction for white collar workers. If you use an area to make crafts to sell on a platform such as Etsy, that space is deductible. And dedicated storage space in a garage counts toward your home office deduction.
4. Car Expenses
Expenses associated with your car are critical, of course, if you use your vehicle to drive for a service like Uber or Lyft. But any use of your vehicle for business--traveling to meet clients, for example--is also eligible.
There are two options to reduce business expenses associated with using your own car to make money. One you can use a mileage allowance of 54 cents per mile driven (dropping to 53.5 cents in 2017) that covers the costs of gas, insurance, and depreciation.
A second option, notes Brian Thompson, a CPA and attorney in Chicago, is that “a taxpayer can deduct actual expenses for gas, insurance, and repairs. A depreciation deduction for ‘wear and tear’ is also permitted.” You need to keep very detailed records of all these expenses.
5. Business Supplies
If you make crafts to sell on Etsy, you’ll especially want to deduct ordinary business expenses such as materials and supplies. But any self-employed person should consider taking this deduction, and another that’s available for the cost of tools, if that’s relevant. Brian Thompson notes, “Sole proprietors can take these deductions; there is no requirement to form a business or LLC.”
A final note:
Self-employment doesn't make it any less important to submit your taxes on time, to avoid penalties. Those late fees are hefty:
- 5% of the unpaid taxes each month or partial month that your federal tax return is late
- A failure-to-file penalty of as much as 25% of taxes owed
The penalties if you file but do not pay on time are actually lower: A mere 0.5% of your unpaid taxes for each month or partial month after the due date up to 25% of your unpaid taxes. If you fail to file and pay on-time, there is a minimum penalty of $135 or 100 percent of the unpaid tax for tax returns filed more than 60 days after the due date or extended due date. It is better to at least file on time, even if you can’t come up with the taxes you owe by tax day.
This story originally appeared on ValuePenguin.