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Tax 101 for Gig Economy Entrepreneurs

Remote and “gig” work are on the rise, and that means there are new tax considerations for this new sector of the workforce

Many workers across the nation are taking advantage of the rising gig economy—whether taking on side jobs to earn extra income, like driving for Uber on the weekends, or freelancing full-time. Some estimates show that around a third of the workforce is taking part in the gig economy, and that number may continue to increase, as workers want better work/life balance, flexible work arrangements, and the potential for higher overall income.

With this surge in self-employment, taxes have become confusing for workers, especially after the Tax Cuts and Jobs Act (TCJA) made some significant changes.

Here are important tax considerations and recent changes for gig economy workers to keep in mind.

1099 forms

First, 1099 forms are likely the most common tax document that a self-employed worker will see. Usually, a company will send a 1099-MISC to freelancers with all income reported above $600. Or, a 1099-K may be sent from third-party providers if a worker had more than 200 transactions and earned at least $20,000. The 1099-K form is meant to report payments that a business receives from credit or debit cards or processors such as PayPal.

However, these forms can create confusion for freelancers, as some clients may not provide them. Gig economy workers should be aware that they need to report all income, even if they made below these thresholds and/or didn’t receive the forms.

Self-employment taxes

Another important tax item to be aware of is the self-employment tax. This is a 15.3 percent tax in addition to income tax. The reason this extra tax exists is so that self-employed workers can pay Social Security and Medicare taxes that would normally be taken out by a traditional employer.

Even though this may seem like a pretty high tax, freelancers can deduct half of it to offset income.

Qualified business income pass-through deduction

The TCJA added a qualified business income deduction of 20 percent, which means that certain businesses could owe less tax. This deduction applies to the following entities, with certain qualifying factors:

  • Sole proprietorships
  • Partnerships
  • S-corporations
  • Some estates and trusts

This is a pass-through deduction that intends to provide help to smaller businesses, as the income limit is $157,500 per year or $315,000 for joint filers. Gig economy workers who are incorporated in certain ways may be able to take advantage of this deduction, in addition to their other qualifying business expenses. Consult with a qualified tax advisor to determine if and how you may be eligible.

Quarterly taxes

Another important part of paying taxes as a freelancer or gig economy worker is the fact that quarterly taxes are often now due. These are estimated tax payments due four times per year, and if freelancers fail to pay them, they’ll could have to pay tax penalties at the end of the year.

This requirement is due to the fact that taxes aren’t automatically withheld from freelance income, as with a traditional employer. Note, however, that gig economy workers who have a main salary that does have taxes withheld may not need to make quarterly estimated tax payments—though it’s advisable to avoid a potentially surprising, large tax bill on the freelance income when April rolls around.

Business equipment deduction

The TCJA increased the deduction amount for business equipment. Now, up to $1 million can be deducted in equipment purchases, including computers, furniture, software, and more. However, actual business income will determine how much can be deducted and freelancers must carefully adhere to qualifying categories of equipment.

Other deductions for gig economy workers

The TCJA cut some deductions, including those for meals and entertainment. This means that some client expenses, such as a dinner meeting, won’t be able to be fully deducted. However, 50 percent of meals still may be eligible, so long as they were directly related to the business.

Other deductions that gig economy workers are eligible for include the home office deduction and the health insurance deduction (if they pay for their own insurance). Many other expenses related to running a business, such as a vehicle, a professional subscription, exchange rate fees, and more, may be deductible, so workers should keep track of all these expenses.

It’s important for those already in the gig economy and those considering entering it to understand these tax issues. Taxes need to be handled carefully so that all income is reported correctly and expenses are accurate.

Gig economy workers need to remember that:

  • Income must be reported regardless of whether a client sends a 1099 form
  • Self-employment tax is in addition to income tax
  • Freelancers may be eligible for the qualified business income deduction of 20 percent
  • Quarterly estimated taxes should be paid to avoid penalties or a surprising yearly payment
  • The TCJA increased the business equipment deduction
  • Meals and entertainment are no longer fully deductible

To discuss tax guidelines with a professional, contact Provident CPA & Business Advisors. We provide tax planning and business consulting services to help you navigate requirements while growing your business.

How the 2018 Tax Cuts and Jobs Act May Impact Your 2020

Even though it began in 2018, the TCJA’s effects are only now in full swing. How will it impact you in the next year?

Changes in the Tax Cuts and Jobs Act (TCJA), which first went into effect in 2018, have really only been felt now that we’re well into 2019, and 2018 taxes have been filed. You may be aware of some of the bigger changes, like adjusted income tax brackets, but the TCJA actually brought updates to quite a few areas. And some changes didn’t go into effect until 2019 and will thus be new for 2020 tax filing.

As the U.S. Department of Treasury website indicates, the TCJA is the “most comprehensive tax legislation passed in more than 30 years.” While you may not feel the impact of each and every change, it’s important to be aware of how updates could affect you moving forward.

Here is a guide to some of the ways the 2018 TCJA may impact your 2020.

An overview of select changes

Income tax brackets: The TCJA made changes to the income-tax brackets, mostly lowering the rates—for instance, the tax rate for a single taxpayer with a salary of $50,000 went from 25 percent in 2017 to 22 percent in 2018. The last bracket was changed from a 39.6 percent tax rate for income over $418,400 in 2017 to a 37 percent rate for income over $500,000 in 2018. The bracket for income between $0 and just over $9,000 remained at 10 percent.

Health insurance: The Affordable Care Act (ACA) is still in effect, but the TCJA removed the requirement to have health insurance coverage. This means that there’s no longer a penalty for those that don’t have it. This is pretty significant for many people, since the penalty had been almost $700.

Estate tax: The federal estate tax will be $11.4 million for single filers and $22.8 million for married couple beginning in 2019, meaning that the tax will impact even fewer people than it did before.

Standard deduction: In 2017, the standard deduction was $6,350 for single filers, and that almost doubled under the TCJA to $12,000 in 2018.

College savings: Under the TCJA, parents can distribute up to $10,000 per year, per student, from a 529 savings account (college) for tuition and other expenses.

Child tax credit: Another increase came to the child tax credit, which is now doubled to $2,000 per child. Because this credit only applies to children under 17, another $500 credit has been created for dependents who are over 17.

Personal exemption: The personal exemption, which allowed you to deduct a certain amount for each eligible member of your household, is no longer an option. In 2017, this amount was $4,050 for yourself, in addition to $4,050 for your spouse and each of your children or dependents. This was expected to increase to $4,150 in 2018, but it’s now $0 because of the TCJA.

The TCJA for businesses

Deduction changes: The TCJA added a new deduction, the qualified business income (QBI) deduction, that gives certain businesses a 20 percent deduction if they are an S corporation, partnership, sole proprietorship, or sometimes, a trust or estate.

The deduction for expenses that relate to activities including entertainment, amusement, or recreation was eliminated. But the IRS says that taxpayers may still deduct 50 percent of business meals if the items aren’t considered “lavish or extravagant.”

Another significant deduction change is a limitation on the business interest deduction for some businesses. Those with less than $25 million in average annual gross receipts have an interest expense limit of business interest income plus 30 percent of the adjusted taxable income and floor-plan financing interest.

Changes for businesses with employees: Some changes only apply specifically to businesses that have employees. One such change is that employers can now deduct reimbursements for bicycle commuting as a business expense, and employers have to include 100 percent of these reimbursements in the applicable employee’s wages. Moving-expense reimbursements must also be included in employee wages.

The TCJA also introduced a tax credit for employers who give paid family and medical leave to employees. However, this credit only applies after December 31, 2017, and before January 1, 2020.

Looking into 2020

So how will the TCJA changes impact your tax experience in 2020, when you file your 2019 taxes?

  • Be aware that income tax brackets have increased a bit again in 2019 due to inflation.
  • The elimination of the personal exemption, while seemingly a big loss, was meant to be counteracted by an increase in the standard deduction and child tax credit.
  • The standard deduction got another increase: up to $12,200 for single taxpayers and $24,400 for married couples.
  • If you don’t have health insurance, you will no longer receive a penalty because of the TCJA. This didn’t go into effect until 2019.

Remember that all of the changes brought by the TCJA aren’t permanent—many are set to expire on December 31, 2025, and lots could change in the political environment before then.

If you have any questions about tax reform and how it will impact you, get in touch with the professionals at Provident CPA & Business Advisors.