What Income and Deductions Should be Reported
or Taken on Your Tax return in the Gig Economy[1]?
The Gig economy—also
called sharing economy or access economy—is activity where people earn income
providing on-demand work, services or goods. Often, it’s through a digital
platform like an app or website.
Gig Economy Income is Taxable
You must report income
earned from the Gig economy on a tax return, even if the income is:
- From part-time, temporary or
side work
- Not reported on an
information return form—like a Form 1099-K, 1099-MISC, W-2 or other income
statement
- Paid in any form, including
cash, property, goods, or virtual currency
What is Gig Work?
Gig work is certain activity you do to earn income, often
through an app or website (digital platform), like:
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Sell goods online
- Rent equipment
- Provide creative or professional services
- Provide other temporary, on-demand or freelance work[2]
What are Digital Platforms?
Digital platforms are businesses that match
workers' services or goods with customers via apps or websites. This includes
businesses that provide access to:
·
Ridesharing services
·
Delivery services
·
Crafts and handmade item
marketplaces
·
On-demand labor and repair services
·
Property
and space rentals[3]
The Gig economy has caught the attention
of the IRS so much that it has a Gig Economy Center[4]. There is even a video “Understanding the Gig Economy.[5]”
The
IRS Gig Economy Tax Center can help people in this growing area meet their tax
obligations through more streamlined information. The Gig economy is also known
as the sharing, on-demand, or access economy. It usually includes businesses
that operate an app or website to connect people to provide services to
customers. While there are many types of gig economy businesses, ride-sharing
and home rentals are two of the most popular. The Gig Economy Tax Center
streamlines various resources, making it easier for taxpayers to find
information about the tax implications for the companies that provide the
services and the individuals who perform them. It offers tips and resources on
a variety of topics including:
·
Filing requirements;
·
Making quarterly
estimated income tax payments;
·
Paying
self-employment taxes;
·
Paying FICA,
Medicare, and Additional Medicare taxes;
·
Deductible business
expenses; and
·
Special rules for
reporting vacation home rentals.
If you are a Gig worker IRS publication 334
provides a list of forms are you required to file with your income tax return.
What About Deductions?
Deductions are a matter of
legislative grace, and the taxpayer bears the burden of proof. Section 162 allows deductions
against business revenue for all expenses that are "ordinary and
necessary." In contrast, Section 262 disallows
deductions for personal living expenses. Determining what is an ordinary and
necessary business expense versus personal living expense is often not clear
cut. Deductibility can depend on the taxpayer's specific facts and
circumstances and is a frequent issue to be resolved in court cases. In
addition the taxpayer must substantiate his or her expenses and some expenses
must also satisfy stricter substantiation requirements laid out in Section 274(d).
Both self-employed individuals and
employees not reimbursed by their employer apply
the same criteria to determine whether an item is deductible as an ordinary and
necessary business expense. Self-employed individuals can then deduct amounts
on Schedule C as part of their Form 1040[6].
Trade
or Business Deductions
·
Must
be reasonable in about;
·
Must
be related to an activity deemed to be a trade or business;
·
Must
be business related rather than personal expenditure;
·
Must
not be a capital expenditure;
·
Cannot
be incurred in the production of tax-exempt income;
·
Must
not be a violation of public policy;
Ordinary means “customary and not a
capital expenditure“; necessary means “appropriate and helpful.”
IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses,
provides detailed information on how a Gig employee can prove expenses. Proof
of an expense includes the following three items:
·
Adequate records
·
Sufficient evidence
·
Written record
Adequate records are defined
by Publication 463 on page
25: “You should keep the proof you need in an account book, diary, log,
statement of expense, trip sheets, or similar record. You should also keep
documentary evidence that, together with your record, will support each element
of an expense.”
Records of
expenses do not have to be in any particular format, but it must be in a form
that allows the employee to keep a detailed record of the amount, time, place,
and business purpose of the expense. The format used must also enable an
employee the ability to document business meals that take place within the
employee's tax home and meals provided for others when away from their tax
home.
To
substantiate these expenses, a Gig employee must record the following
information in their record:
·
The names of the individuals
in attendance
·
The business purpose
of the meeting
·
The date and place of
the business meeting
The best sufficient evidence
is documentary evidence that supports the employee's expenses. This may include
receipts, canceled checks, or bills. Documentary evidence, however, is deemed
adequate only if it shows the amount, date, place, and essential character of
the expense.
In most cases, the IRS
requires documentary evidence for travel expenses only if the expense is
greater than $75. However, there are exceptions, especially lodging expenses.
Since lodging bills may contain other expenses in addition to room charges
(such as meals, telephone calls, laundry, Internet access, and video rentals),
a hotel or motel must provide an itemized bill. Personal expenses (such as
video rentals) should not be included or reimbursed.
Why
Business Expense Substantiation Is Vital
When a taxpayer provides the IRS with better substantiation, the
IRSs is more inclined to grant deductions.
Deductible Expenses
This article does not cover
self-employed health insurance and retirement contributions. Additionally,
rules for home rentals are beyond the scope of this article. The items
discussed in more depth here are auto costs; cellular phone service; internet service;
work clothing; tools, supplies, and equipment; meals when not away from home;
entertainment expenses; home office, licensing; and inventory, cost of goods
sold, and selling expenses.
Auto Expenses
If you use your car for
business purposes, you may be able to deduct car expenses. You generally can
use one of the two following methods to figure your deductible expenses. The standard
mileage rate or the actual car expenses.
The standard milage rate for 2021 is 56 cents per mile for business
miles driven. f you use the standard mileage rate for a year, you
can’t deduct your actual car expenses for that year. You can’t deduct
depreciation, lease payments, maintenance and repairs, gasoline (including
gasoline taxes), oil, insurance, or vehicle registration fees.
Choosing the Standard Mileage
Rate
If you want to use the
standard mileage rate for a car you own, you must choose to use it in the first
year the car is available for use in your business. Then, in later years, you
can choose to use either the standard mileage rate or actual expenses. If you
want to use the standard mileage rate for a car you lease, you must use it for
the entire lease period. For leases that began on or before December 31, 1997,
the standard mileage rate must be used for the entire portion of the lease
period (including renewals) that is after 1997. You must make the choice to use
the standard mileage rate by the due date (including extensions) of your
return. You can’t revoke the choice. However, in later years, you can switch
from the standard mileage rate to the actual expenses method. If you change to
the actual expenses method in a later year, but before your car is fully
depreciated, you have to estimate the remaining useful life of the car and use
straight line depreciation.
Standard Mileage Rate Not
Allowed.
You can’t use the standard mileage rate if
you:
• Use five or more cars at the same
time (such as in fleet operations);
• Claimed a
depreciation deduction for the car using any method other than straight line,
for example, MACRS;
• Claimed a
section 179 deduction on the car;
• Claimed the
special depreciation allowance on the car; or
• Claimed actual
car expenses after 1997 for a car you leased.
Examples:
Example 1.
Tony and his
employees use his four pickup trucks in his landscaping business. During the year,
he traded in two of his old trucks for two newer ones. Tony can use the
standard mileage rate for the business mileage of all six of the trucks he
owned during the year.
Example 2. Chris
owns a repair shop and an insurance business. He and his employees use his two
pickup trucks and van for the repair shop. Chris alternates using his two cars
for the insurance business. No one else uses the cars for business purposes. Chris
can use the standard mileage rate for the business use of the pickup trucks,
van, and the cars because he never has more than four vehicles used for
business at the same time.
Example 3. Maureen
owns a car and four vans that are used in her housecleaning business. Her
employees use the vans, and she uses the car to travel to various customers.
Maureen can’t use the standard mileage rate for the car or the vans. This is
because all five vehicles are used in Maureen's business at the same time. She
must use actual expenses for all vehicles.
Actual Car Expenses
If
you don’t use the standard mileage rate, you may be able to deduct your actual
car expenses. Actual car expenses include:
·
Depreciation
·
Licenses
·
Lease
payments
·
Registration
fees
·
Gas
·
Insurance
Repairs
·
Oil
·
Garage
rent
·
Tires
·
Tolls
·
Parking
fees
If you have fully
depreciated a car that you still use in your business, you can continue to
claim your other actual car expenses.
Business and Personal Use.
If you use your car for both business and
personal purposes, you must divide your expenses between business and personal
use. You can divide your expense based on the miles driven for each purpose.
Example.
You are a
contractor and drive your car 20,000 miles during the year: 12,000 miles for
business use and 8,000 miles for personal use. You can claim only 60% (12,000 ÷
20,000) of the cost of operating your car as a business expense.
Cellular Phone Service
IRC Section 280F(d)(4) was amended in 2010 to eliminate cellular phones from the
definition of listed property and, as a result a taxpayer can deduct cellular
phone service based on an estimate.
Courts have rules that
taxpayers are required to have both cell phone and internet access for his
employment as a systems engineer, and he has provided a reasonable basis to
accept his estimated expenses," and, as a result, allowed the deductions
for both cell phone and internet service.
Internet Service
The courts consider internet
services a utility, and if they are ordinary and necessary business expenses,
utility expenses are deductible. However, home internet services are frequently
used for both personal and business purposes. Generally, the taxpayer must
provide a reasonable basis for determining how much usage is business versus
personal. Utilities, including internet.
·
Membership
dues for any club organization for business, pleasure, recreation or other
social purposes; and
·
For
a facility or portion of a facility used in connection with the above.
·
An
employee is reimbursed for the cost of meal and/or entertainment (the 50%
reduction rule applies to the party making the reimbursement).
Work Clothing
Work clothing is deductible
under Section 162; these include:
·
The clothing is required or essential for the employment;
·
It is not adaptable to general usage as ordinary clothing; and
·
It is not so worn.
Tools, Supplies, and Equipment
Expenses incurred by
construction workers, electricians, plumbers, or other trades is the necessity
to purchase tools and equipment are deductible. For an over-the-road truck
driver, the courts allowed a deduction for a number of truck related supplies
including antennas, CB and XM radio and related repairs, atlases and maps, a
scanner, crowbars and other tools, flashlights and batteries, first aid kit,
jumper cables, floor mats, seat covers, tarps, power cords and boosters,
electrical and duct tape, towels and paper towels, and shovel and broom.
In general, supplies that
are determined to be ordinary and necessary for the taxpayer's profession are
deductible. Self-employed social workers are allowed a supplies deduction rule
for computer supplies, reference materials, textbooks, and professional
periodicals. Additionally, for a security guard, items such as a
weapons holder, a handgun, a flashlight, and handcuffs were all considered
ordinary and necessary. Also, a flight attendant was allowed a
deduction for luggage.
Office in the Home
Most expenses for personal use assets are
not deductible. Except for certain expenses (primarily interest and taxes) that
is the case with a personal residence. However self-employed individuals are
allowed a deduction for office in the home expenses if a portion of the
residence is used exclusively on a regular basis as either:
·
A
place of business used by clients, patient, or customers[7].
·
There
is no other fixed location of the trailer business where the taxpayer conducts
these activities.
The simplified method, has a rate of $5 a square foot for business
use of the home. The maximum deduction is $1,500.
Special rules apply for certain business owners:
· Daycare providers complete a special
worksheet, found in Publication 587.
· Self-employed individuals use Form 1040,
Schedule C, Line 30 to claim deduction
· Farmers claim the deduction on Schedule F,
Line 32[8].
Inventory, Cost of Goods Sold,
and Selling Expenses
In the case of businesses
that resell goods, such as selling on eBay, Esty or Amazon, the taxpayer is
expected to maintain inventory records, and a deduction is allowed for cost of
goods sold (e.g, cost or adjusted basis of the asset). If the taxpayer cannot
establish a basis, the presumption is that the basis is zero.
In addition to cost of goods
sold, taxpayers are allowed other ordinary and necessary selling expenses. For
example, courts have allowed deductions for PayPal fees, eBay fees, postage,
and packaging. Any
fees charged for use of a digital platform would be deductible.
Other Common Business Expenses
Advertising;
Bad debts;
Salaries and wages;
Fringe benefits;
Rent;
Insurance;
Accounting and legal fees;
Capital expenditures which may be depreciable;
Business gifts (limited to $25).
Political contributions by
businesses and individuals are not deductible.
Lobbing expenses and amounts paid to
influence voters or not deductible.
Business investigation and start-up
costs, for example survey of potential markets, expenses of securing
prospective distributors or suppliers, advertising, employee training are
deductible in the year paid or incurred is the taxpayers is currently in a
similar line of business as the start of business. If not in a similar line of
business and a new business is investigated but not acquired, start-up cost or not deductible[9].
Suggestion:
If you prepare your own return, take time now to lay out how you
will keep track of these expenses and the ever -important supporting detailed
records. If you use an accountant that
may already have such a format for gig workers that ties to the professional’s
software, it may be easier to adopt the existing format.
Note:
In a May 2021 report by the TIGTA
it noted "IRS did not always take compliance
actions on non filers of tax returns and under reporters related to P2P payments
even when information reporting was available," TIGTA
said. In total, some 170,000 taxpayers "potentially" did
not report up to $29 billion of payments received per Form 1099-K documents issued to them by three P2P payments
application companies. While taxpayers using P2P payment applications may
not always receive a Form 1099-K, they are still required to report any taxable
income on their returns, TIGTA stressed.
New for
2022-Reporting by third party settlement organizations. Congress has tightened the de minimis exception to tax reporting by third-party settlement organizations (TPSOs, e.g.,
PayPal, Venmo, Zelle) by requiring reporting of transactions that exceed $600
(and eliminating the 200-transaction threshold). The American Rescue Plan Act
(ARPA) also clarified that TPSO reporting obligations are limited to transactions involving goods and
services. This means that, beginning in 2022, if you run a business where
customers pay you via a TPSO, and you receive more than $600 in total during
the course of the year via a TSPO, the TSPO is required to report that amount to the IRS - regardless of how
many customers are paying you - and to send you a Form 1099-K, Payment
Card
and Third-Party Network Transactions.
[1][1]
This article is written by
Frank L. Brunetti, Esq. All rights are reserved.
[2] Note: This
list does not include all types of Gig work.
[3] Note: This list does not include all types of digital
platforms.
[4]
https://www.irs.gov/businesses/gig-economy-tax-center
[5] https://www.irsvideos.gov/Individual/PayingTaxes/UnderstandingTheGigEconomy
[6] Since 2018, employees can no longer deduct unreimbursed
employee expenses. These expenses were included as part of miscellaneous
itemized deductions and that category was eliminated by the Tax Cuts and Jobs
Act (TCJA).
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