The sharing economy – or gig economy – is a huge benefit for many people. It can be a great source of additional income or perhaps a full-time job.
Yet there are some drawbacks. And perhaps one of the biggest is taxes.
Interestingly, the IRS has indicated that the sharing economy is a major priority now. And yes, this could be an ominous sign that the agency is going to focus more resources on enforcement!
OK then, what are some of the strategies to keep in mind to manage through the tax process? Well, to get insight on this, I recently talked to Mike Slack, who is a Tax Research Analyst at H&R Block, Inc. (HRB).
Here’s what he had to say:
Tip #1: The Mileage Rules
When it comes to deducting mileage, you have two options. The simple one is the standard mileage rate, which involves multiplying your business miles by 54 cents (the rate changes each year). Or you can use the actual vehicle expense method. This requires quite a bit of recordkeeping, such as with receipts for gas/oil, maintenance, registration fees, insurance, depreciation and so on.
Regardless of the method you chose, the total deduction can be substantial. But then again, this is also why the IRS tends to scrutinize it.
So to protect yourself, you need to make sure you accurately keep track of your miles, such as with a mobile app (examples include Everlance and Hurdlr, which you can use with TaxEdge to complete your tax return).
What’s more, you need to have a good understanding of the rules. After all, did you know you cannot deduct your commuting miles? For example, suppose you are an Uber driver and leave your home to pick up a passenger. For this, you will not be able to get a deduction. Although, if you qualify for the home office deduction, you will be able to do so!
Tip #2: Reporting Income
As should be no surprise, the various tax regulations have not necessarily kept up with the pace of change in the sharing economy. Just look at reporting. A company like Uber or Lyft will base their tax statements on rules for credit card merchants. The result is that a driver may not reach a threshold – which means that he or she will not receive anything.
However, this does not mean you are exempt from paying taxes. You need to report everything. Period.
And by the way, if you do not, the IRS is pretty good at determining when people are hiding income.
Tip #3: Estimated Tax Payments
When filling out a tax return, it’s common for those in the sharing economy to get a rude shock. Often there is an unexpectedly large tax bill.
The reason is that a self-employed person must essentially act as if he or she is an employer. This means having to set aside the taxes. In fact, the IRS prefers that you do this by making quarterly estimated tax payments.
If not, a person can get caught in a bind, without the funds to pay the tax bill. This may mean having to work something out with the IRS, such as an installment plan.
The good news is that mobile apps like Everlance and Hurdlr make it easy to deal with estimated tax payments — which will certainly go a long way in avoiding headaches.
Article via Forbes