Tax Tips for the Sharing Economy

The sharing economy seems to know no boundaries. Sure, you can work as delivery person, ditch digger or even a dog walker, among a wide range of jobs in the unskilled labor market. But companies are now offering freelance gigs in professional fields like medicine and law as well. If it fits into your schedule, consider the possibilities.

As a freelancer, you can essentially work when you want, where you want and with whom you want. Companies such as Spare5, SpareHirer, Freelancer and UpWork provide numerous types of jobs, while others like LawTraders and DoctorsOnDemand are devoted to a specific profession. The services can involve everyone from chefs to computer programmers to mechanics. Usually, you bid for jobs and the company parcels out the work as needed.

What does this mean from a tax perspective? Unfortunately, you may not have as much flexibility as you do in picking up freelance jobs. No matter what your line of work, you have to pay the tax piper.

Start with this basic premise: If you earn money from freelancing, whether it’s considered “skilled” labor or not, the income is taxable. Generally, you will be treated as an independent contractor, rather than a company employee, and you’re required to report amounts on the1099s you receive to the IRS. Note that Form 1099-K is used to report income processed through third-party networks like PayPal if your earnings exceed $20,000 and you have more than 200 transactions.

For example, if you work freelance as a caterer a dozen times during the year and earn $10,000, you won’t receive a 1099-K, but you still must pay tax on the $10,000 of income. The amount is entered on the Schedule C you’re required to file as a self-employed individual. This rule applies even if you’re paid solely in tips.

And it’s not just income tax you have to worry about. Because you’re self-employed, you must pay self-employment tax, the equivalent of FICA tax withheld from employee paychecks. The tax rate is double the usual rate for employees, but then you can deduct half the self-employment tax when you file your return. Make sure you meet all your tax obligations through quarterly installments of estimated tax.

Otherwise, you could be hit with interest and penalties.

The flip side of paying tax on business income is that you can deduct your “ordinary and necessary” business expenses. This may includes expenses for property used for both business and personal purposes. For instance, you might utilize a tablet for your freelance jobs as a graphic artist. Generally, if the device is used 75 percent for business, you can write off 75 percent of the applicable expenses, including a portion for depreciation based on the tablet’s cost. Similar rules apply to cell phones and other electronic devices.

Best of all, if you use your own vehicle to go back and forth from jobs, you’re entitled to deduct the costs attributable to business use, including depreciation. But the IRS imposes strict recordkeeping requirements and other special rules apply to vehicle use.

The need to keep detailed records in the sharing economy can’t be emphasized enough. The IRS has just posted an online tip, “Keep in Mind These Basic Tax Tips for the Sharing Economy” (IRS Tax Tip 2017-39, 3/30/17), for guidance. It is available at https://www.irs.gov/uac/keep-in-mind-these-basic-tax-tips-for-the-sharing-economy.