Tag: income from side jobs

Many individuals who work in the gig economy also have a conventional job that provides them with a steady salary or wages. They obtain a W-2 form from their employer and must file a tax return. They may overlook the smaller amounts earned from their side jobs, but this would be a mistake.

Gig workers are considered independent contractors or freelancers by those who hire them rather than employees. As such, they do not receive W-2s at the end of the year. No taxes are withheld from their income, and the companies they work for do not pay a portion of their required Medicare and Social Security contributions.

The IRS considers earnings from side hustles or freelance work as self-employment income. For this income, you will file a Schedule C, Profit or Loss from Business. This form will be part of your income tax return, and the Net Profit or Loss will transfer to your 1040.

Each employer you worked for as an independent contractor should provide you with a 1099-NEC form. If you have earnings of $400 or more reported on these forms, you must file a Schedule C. This form requires you to sum up your total income and write it in Line 1. You can add up your income on Schedule C if you have worked multiple freelance jobs.

In Part II, you will need to list all the legitimate expenses for your business. This is crucial to ensure that you pay the correct amount of taxes and do not overpay.

• Your expenses may include the costs incurred while driving your car to transport passengers or make deliveries. You should keep track of the miles you have driven and use the standard mileage rate of 65.5 cents per mile set by the IRS. You can enter the total miles driven on Page 2, Part IV, and then multiply the total mileage by .655 to get the exact value, which you can then enter on Line 9.
• Advertising and marketing expenses, such as creating business cards, fliers, a magnetic sign for your vehicle, or a website, are entered on Line 8.  
• Contract labor comes from hiring someone to assist you with jobs. If you are a freelance web designer, you might subcontract the creation of a logo for your client to a graphic designer or artist. If you had those expenses, enter the total on Line 11.
• Insurance for your business is entered on Line 15. Typical insurance charges are surcharges added to your vehicle insurance due to making deliveries; errors and omissions insurance if you provide a professional service such as tax preparation; property insurance to cover a loss of tools or equipment for fire or theft; and general liability insurance.
• Commissions and fees paid to Fiverr, Uber, Upwork, or another job matching service are entered on Line 10.
• Payment processing fees. If you use PayPal, Venmo, or another service to process payments, you are paying them a percentage of the charges for their service. If your clients pay by credit card, then your credit card provider will deduct a service fee. These fees are counted as Other Expenses entered on Line 27a. You can detail these expenses in Section V. 
• Cellphone and internet service charges are deductible if used primarily for business. These expenses are typically included on Line 27a and in Section V.
• Supplies used to operate your business are deductible. Office supplies are standard for most companies. A food delivery driver might also invest in insulated bags to keep food warm or cold, a pet sitter might purchase pet treats and toys, and a handyman would buy tools and hardware. Keep track of these and deduct them from Line 22 on your Schedule C form.

When you have entered all your expenses, total them on Line 28. Subtract the total from your income to determine your Tentative Profit. For most independent contractors, tentative profit is the same as Net Profit. However, those working from a home office may elect to deduct some home office expenses, lowering your taxable profit but requiring additional work.

Cost of Goods Sold is calculated in Section III, but as gig economy workers do not commonly incur it, we will not include it in this post.

Your Net Profit on Line 31 should be transferred to Line 3 of your 1040 and also to Line 2 of your Schedule SE. Schedule SE is used to calculate your self-employment tax. Your tax software or your tax preparer will do this automatically. Your role is to accurately track your income and deductible expenses from your side hustles so that your tax liability will be accurate.

Check back next week for another Tuesday tax tip.