You have surely heard everyone talking about the “gig economy”. With the rise of apps such as Uber, Etsy, Door Dash and sites like Upwork it seems the world is working a side gig or maybe several side gigs. Sometimes the side gigs even turn into full time employment. Employment is a key word here, because as a general rule you are not an “employee” when you work in the gigi economy. No one is withholding taxes for you or paying for healthcare or 401K benefits for you. At the end of the year you will not be receiving a W2 and you will not have any income tax already paid in for you. Instead you will receive a 1099 that reports the gross amount you were paid for gig work.
There are a lot of terms you hear such as 1099 work, gig work or independent contractor. They are all essentially the same. These one or more side hustles are a business that you own and you pay the tax for the earnings. What you are is self-employed and while you will file a separate schedule (Schedule C) with your Form 1040, you generally do not need to file a separate tax return for the business. The net profit from your “business” is added to your other taxable income, plus you pay self employment tax on the net earnings.
NET earnings is another important term, because your tax is based on what you were paid minus your business expenses. In fact business expense are one of the key factors to make sure you don’t pay more tax than you really have to.
Best practices for keeping track of your new business:
- There is no requirement that you keep business and personal money separate, but if your independent contract work is significant, open a separate checking account for the business. Pay business expenses out of this account and deposit your earnings into this account. It is fine to transfer money to your personal account when the rent and electricity is due, but try to keep the business and personal money separate.
- Now that you have a separate business account, sign up for an online app such as Wave Apps or Quickbooks Online. Both apps will make it easier to keep track of your business income and expenses and greatly simplify tax reporting time for you. Quickbooks has a lot of functionality, but there is a monthly fee. Wave is fairly basic, but the standard program is free.
- LLC or NOT? An LLC is a very flexible option for a single owner of a business. Very little changes in your tax reporting when you have a single member LLC, but it does offer you some structure and maybe even liability protection for you and your business.
- If the side gig(s) are a significant part of your income, develop a relationship with a CPA. Ok maybe you think this sounds self-serving, but taxes for a business is not about filling in the blanks on a form. You need someone who can answer questions and offer guidance when you need it. DIY tax software is not going to give you that. In my experience most business owners either have some technical skill that they sell or they are just really good salespeople. Rare are they operating their business because they are great accountants or bookkeepers. If you take the time that you would have spent figuring out your bookkeeping and taxes and instead do whatever it is that really brings value to your business, you will find it easy to justify the cost of a professional to help with those other tasks.
You might also be interested in https://www.bankrate.com/mortgages/guide-to-getting-a-mortgage-as-a-gig-worker/.