Author: Meg Rosset

Tax Tips for Workers in the Gig Economy

The gig economy, also called sharing or access economy, is defined by activities where taxpayers earn income providing on-demand work, services, or goods. This type of work is often carried out via digital platforms such as an app or website. There are many types of sharing economy businesses including two of the most popular ones: ridesharing, Uber and Lyft, for example, home rentals such as Airbnb, and TaskRabbit.

If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides or other goods or services, they may be part of the sharing or gig worker economy. If so, there are several things taxpayers should keep in mind.

Income is Taxable.

Income from these sources is taxable, regardless of whether an individual receives information returns. This is true even if the work is full-time, part-time, or a side job or if an individual is paid in cash or if an information return like a Form 1099 or Form W2 is issued to the gig worker. Taxpayers may also be required to make quarterly estimated income tax payments and pay their share of Social Security, Medicare, or Medicaid taxes.

Special Rules for Renting Out Your Home

Special rules generally apply if a taxpayer rents out his home, apartment, or other dwelling but also lives in it during the year – this residential rental income may be taxable. For more information about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxpayers can also use the Interactive Tax Assistant Tool, Is My Residential Rental Income Taxable, and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.

Worker Classification: Employee or Independent Contractor

While providing gig economy services, the taxpayer must be correctly classified. This means the business or the taxpayer must determine whether the individual providing the services is an employee or an independent contractor. Taxpayers can check out the worker classification page on IRS.gov to determine how they are classified.

This is important because some gig workers may be classified as independent contractors and may be able to deduct business expenses, depending on tax limits and rules. Taxpayers need to keep records of their business expenses. For example, a taxpayer who uses his or her car for business often qualifies to claim the standard mileage rate, which is 57.5 cents per mile for 2020.

Paying Taxes on Gig Income

Since income from the gig economy is taxable, it’s important that taxpayers remember to pay the right amount of taxes throughout the year to avoid owing when they file. An employer typically withholds income taxes from their employees’ pay to help cover income taxes their employees owe. However, gig economy workers who are not considered employees must pay their taxes. There are two ways to do this:

  • Submit a new Form W-4 to their employer to have more income taxes withheld from their paycheck if they have another job as an employee.
  • Make quarterly estimated tax payments to help pay their income taxes throughout the year, including self-employment tax.

If you have any questions about the sharing economy and your taxes, help is just a phone call away.

Employee Business Expense Deductions: Who Qualifies?

Prior to tax reform, an employee was able to deduct unreimbursed job expenses, along with certainother miscellaneous expenses, that was more than two percent of adjusted gross income (AGI) as long as they itemized instead of taking the standard deduction. Starting in 2018, however, most taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions unless they are a qualified employee or an eligible educator.

No other type of employee is eligible to claim a deduction for unreimbursed employee expenses. In other words, employee business expenses can be deducted as an adjustment to income only for eligible educators and specific employment categories such as:

  • Armed Forces reservists
  • Qualified performing artists
  • Fee-basis state or local government officials
  • Employees with impairment-related work expenses

Qualified Expenses

A qualified expense is one that is:

Paid or billed during the tax year

  • Used for carrying on a trade or business of being an employee, and
  • Ordinary and necessary

Nondeductible Expenses

Taxpayers should also know there are nondeductible expenses as well. Examples of nondeductible expenses include club dues, commuting expenses, fees and licenses, such as car licenses, lunches with co-workers, meals while working late, expenses to improve professional reputation, and capital expenses. A full list of nondeductible expenses can be found in Publication 529, Miscellaneous Deductions.

Please call if you have any questions.

COVID-related Tax Relief Act of 2020

The Consolidated Appropriations Act, 2021, H.R. 133 included funding for the government, extensions for expiring tax extenders, COVID tax relief under the COVID-related Tax Relief Act of 2020, and many more items. Passed by both the House and Senate, it was signed into law by President Trump on December 27, 2020.

Let us look at a few of the highlights related to pandemic taxpayer relief:

Individuals

Economic impact payments. $600 per taxpayer ($1,200 for married taxpayers filing jointly) and an additional $600 per qualifying child (under age 17). The recovery rebate payment begins to phase out starting at $75,000 of modified adjusted gross income for single filers, $112,500 for heads of household, and $150,000 for married taxpayers filing jointly. These payments are like the ones many taxpayers received earlier this year under the CARES Act.

Unemployment benefits. Additional unemployment insurance in the amount of $300 has been extended for an 11-week period beginning from December 26, 2020.

Educator expenses. Clarification that Personal Protective Equipment (PPE) used for the prevention and spread of COVID-19 will be treated as a deductible expense, retroactive to March 12, 2020.

Charitable contributions – Nonitemizers. The $300 above-the-line deduction for cash contributions given to a qualified charitable organization is extended through 2021 and increases to $600 for married taxpayers filing joint returns. In 2020, the maximum amount was $300.

Charitable contributions – Itemizers. The increased contribution limit to qualified charities that was specified in the CARES Act is extended through 2021 and applies to individuals and corporations. Amounts of up to 100 percent of adjusted gross income (AGI) are allowed as deductions (same as 2020). In 2019, the limit for the deduction for cash contributions was 60% of AGI.

Earned Income. For the 2020 tax year, taxpayers may use earned income amounts from the immediately preceding tax year when figuring the Earned Income Tax Credit and the Additional Child Tax Credit.

Flexible spending arrangements. Taxpayers can rollover unused amounts from 2020 to 2021 and from 2021 to 2022 and employers may allow employees to make a contribution change mid-year in 2021.

Money purchase pension plans. The COVID-related Tax Relief Act of 2020 also allows money purchase pension plans to be included as a qualified retirement plan, retroactive to the CARES Act. The CARES Act allowed taxpayers to make penalty-free withdrawals of up to $100,000 from certain retirement plans for coronavirus-related expenses, with the option to pay tax on that income over a three-year period or recontribute withdrawn funds.

Businesses

Paycheck Protection Program (PPP) Loans. Retroactive to the effective date of the CARES Act, PPP loans that are forgiven will be treated as tax-exempt income. Gross income does not include loan forgiveness for Economic Injury Recovery Loans (EIDLs) and certain other loans or loan repayment assistance. Under the CARES Act, taxpayers receiving an EIDL were required to reduce any PPP loan forgiveness by the amount of the EIDL.

In addition, businesses with 300 or fewer employees with a gross revenue loss of 25 percent in any quarter of 2020 compared to the same quarter in 2019 are eligible for a second round of PPP loans.

Deductible expenses. Deductions are also allowed for deductible expenses (that would otherwise be deductible) paid for with the proceeds of a forgiven PPP loan. This reverses earlier IRS guidance that stated no deduction would be allowed. This tax provision applies to the second round of PPP loans as well.

Payroll tax credits. Refundable payroll tax credits for paid sick and family (Families First Coronavirus Response Act) leave are extended through March 2021. Employers are not required to provide paid leave after December 31, 2020; however, employers may still claim the credit if the employee would have qualified for paid leave if the mandate had been extended beyond December 31, 2020, and the employer provides paid leave.

Employee retention tax credits. Implemented as a refundable credit under the CARES Act, the employee retention tax credit (ERTC) is extended through June 30, 2021. The following also applies for calendar quarters beginning after December 31, 2020:

  • The credit rate is increased from 50 to 70 percent of qualified wages.
  • The limit on per-employee creditable wages is increased from $10,000 for the year to $10,000 for each quarter.
  • The required reduction in a year-over-year decline in gross receipts on a quarterly basis is reduced from 50 to 20 percent.
  • When determining the relevant wage base, the definition of a “large employer” that can only claim the credit for employees that are not working because of the COVID pandemic increases from more than 100 to more than 500 employees.
  • Certain government employers are now allowed to claim the ERTC.
  • Safe harbor allowing employers to use prior-quarter gross receipts to figure eligibility.
  • New employers in 2020 (i.e., those not in existence in 2019) can claim the credit.

Furthermore, and retroactive to the date of the CARES Act, the ERTC is expanded to allow employers who receive PPP loans to qualify for the credit with respect to wages that are not paid with forgiven PPP proceeds. It also clarifies that group health plan expenses can be considered qualified wages even if no other wages are paid to an employee.

Employee portion of payroll tax deferral. The repayment period for deferral of payroll tax is extended through December 31, 2021.

Employee Retention Credit Could Help Your Business

Businesses that have been impacted financially by COVID-19 may be able to take advantage of a new, refundable tax credit called the Employee Retention Credit. The credit is designed to encourage businesses to keep employees on their payroll and is worth 50 percent of qualifying wages up to $10,000 that are paid by an eligible employer.

Does my business qualify for the Employee Retention Credit?

The credit is available to all qualified employers regardless of size, including tax-exempt organizations.

The credit is not available to small businesses who take small business loans or state and local governments and their instrumentalities.

What is a qualifying employer?

There are two categories of qualified employers:

  • The employer’s business is fully or partially suspended by government order due to COVID-19 during a calendar quarter.
  • The employer’s gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

How is the credit calculated?

The amount of the credit is 50 percent of qualifying wages paid up to $10,000 in total. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care.

What is a qualifying wage?

Qualifying wages are wages that are based on the average number of a business’s employees in 2019. There are two different measures for business, depending on size:

Employers with less than 100 employees. If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.

Employers with more than 100 employees. If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

How do I receive the credit?

While many tax credits are available when filing a tax return, the employee retention credit works differently in that employers can be reimbursed immediately by reducing their required payroll tax deposits. Payroll taxes, which include federal income tax withheld as well as taxable social security wages and tips, taxable Medicare wages and tips, and additional Medicare tax withholding, are taxes that have been withheld from employees’ wages. Generally, these payroll tax deposits are filed quarterly on Form 941, Employer’s Quarterly Federal Tax Return.

When can I start reporting qualified wages?

Eligible employers should report their total qualified wages and the related health insurance costs for each quarter on Form 941 beginning with the second quarter (March 12, 2020).

Wages paid through December 31, 2020, are also eligible for the credit.

What if my payroll tax deposits are less than the credit?

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19

Help is just a phone call away.

Please contact the office if you need more information on the Employer Retention Credit and other COVID-19 economic relief efforts.

Watch Out for Coronavirus-related Scams

Taxpayers should be on the lookout for calls and email phishing attempts regarding the Coronavirus, or COVID-19 that could lead to tax-related fraud and identity theft. Because criminals take every opportunity to perpetrate a fraud on unsuspecting victims during times of need, taxpayers should also be skeptical about text messages received and websites and social media attempts to request money or personal information.

Retirees Targeted

Seniors should be especially careful at this time. In most cases, the IRS will deposit economic impact payments (sometimes called recovery rebates or stimulus payments) into the direct deposit account taxpayers previously provided on tax returns and taxpayers should not provide their direct deposit or other banking information for anyone to input on their behalf into the secure portal.

For retirees, the $1,200 payments are sent automatically. There is no additional action or information is needed on their part to receive this. Retirees – including recipients of Forms SSA-1099 and RRB-1099 − should also know that they will not be contacted by the IRS via phone, email, mail or in person asking for any kind of information to complete their economic impact payment.

What to Watch Out For:

Scammers use a number of techniques including:

  • Emphasizing the words “Stimulus Check” or “Stimulus Payment.” The official term is economic impact payment.
  • Asking the taxpayer to sign over their economic impact payment check to them.
  • Asking by phone, email, text or social media for verification of personal and/or banking information saying that the information is needed to receive or speed up their economic impact payment.
  • Suggesting that they can get a tax refund or economic impact payment faster by working on the taxpayer’s behalf. This scam could be conducted by social media or even in person.
  • Mailing the taxpayer, a bogus check, perhaps in an odd amount, then tell the taxpayer to call a number or verify information online in order to cash it.

Unsolicited emails, text messages or social media attempts to gather information that appear to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), should be forwarded to phishing@irs.gov.