If you’re making money with a side gig, I have bad news and good news for you. The bad news: You have to pay taxes on that extra cash. The good news: With some creative (and legal) accounting, you might be able to turn that side gig income into a tax cut… or at least seriously reduce any tax you might owe on it.
Two tax options for side gig income
Whether you do odd jobs for TaskRabbit, clean up as an Airbnb host, drive for Lyft, or offer freelance services, any cash you pick up gets added to your taxable income. But where and how you report that side money can make a serious difference in the taxes you owe on it.
- The IRS’s first choice: Just include it as another line item as “other income.” That way, there’s nothing to think about, and you pay tax on the full amount.
- A better choice for you: Treat your side gig like a business… because it is one. And that means you can deduct all of your “ordinary and necessary” business expenses – and put a serious dent in your tax bill.
Depending on the type of side gig(s) you have, you’ll work with either Schedule C (this cover most gigs) or Schedule E (for renting out space). Either way, it pays to keep track of any expenses you rack up in your pursuit of extra income.
Schedule C when you’re the business
Most side gigs fall into Schedule C territory, the form for reporting “Profit or Loss from a Business.”
Any company you work for has to send you a Form 1099-MISC if you earn at least $600 during the year. If you earn less than that, or don’t get the form for some other reason, you still have to report the income… the IRS fines, penalties, and interest can be pretty steep if you don’t.
Side note: Having more income may not be great for your tax bill, but it is good when you’re trying to rent an apartment or apply for a loan.
Now come the deductible expenses – pretty much anything you paid for to keep the gig going, attract more customers, or offer better service. You’ll want to deduct every possible penny to shrink that income down for tax purposes. Your expenses have to make business sense for the type of gig you’re doing (like sheet music for a guitar instructor). Here are some examples of common expenses you might not realize you can take:
- Home office deduction (the square-foot method is super easy)
- Mileage (for driving to meet customers and other business outings)
- Business cards
- Deprecation expense (for any equipment you use)
- Education (like webinars and e-books)
If you’ve made at least $400 after deducting every expense you can think of, you’ll also complete IRS Schedule SE for self-employment tax (tax apps and programs usually do this automatically).
If you ended up shelling out more for expenses than you brought in, that business loss offsets the rest of your taxable income, lowering this year’s tax bite.
Special tips for Lyft and Uber Drivers
When you drive for a ride-sharing service, you may get two different types of 1099s (IRS forms that report payments) for your work.
A 1099-K covers any payments for driving you got directly from customers.
Form 1099-MISC reports any non-driving income, including things like referral bonuses.
Here’s the tricky part about your 1099-K: The main dollar amount on this form, found in Box 1a, is the total customer payment – not just the payment you actually got. So you’ll need to include the ride-sharing service’s commissions and fees in with your deductible expenses.
You may also have expenses that other side gigs don’t, such as:
- Car wash
- Car detailing
- Bottled water and snacks (for customers)
- Smartphone charges (unless you have a separate phone for this, you can only deduct the business portion)
When it comes to your driving expenses (like gas, repairs, and insurance), you’ll probably make out better using the standard mileage deduction, which is 53.5 cents a mile for 2017. Make sure to keep a mileage log that tracks all of your professional driving, including miles you drove for rides that were cancelled or trips to meet up with inspectors, just in case the IRS asks for proof.
Schedule E for rental gigs
When you’re renting out space in your home for extra money, all of your rental earnings go on Schedule E. And when you rent out property, the list of deductible expenses is pretty long.
The 14-day rule: If you live in the space you’re renting – like many Airbnb hosts do – you only have to report your rental income if you that space is rented for 15 days or more during the year. If you only rented it for 14 days, that’s totally tax-free money.
Any expenses directly tied to your rental income are 100% deductible. Those include things like
- Cleaning services
- Airbnb (or HomeAway or VRBO) fees
- Rental insurance
- Decorating the rental area
- Guest towels and linens
Indirect expenses like mortgage interest, property taxes, and utilities have to be allocated between the guest-time and you-time in the house (or by area if you rent out a room or section of your home).
If you lose money on your rental gig, you may be able to deduct those losses against the rest of your income, reducing your overall tax bill.
Should you go to a pro?
If you made a lot of money on your side gig and you’re not sure what you can deduct from that income, consider talking to a CPA – at least the first year that you’re in business.
Professionals know about deductions that you may not, and they’ll be right by your side if the IRS decides to call you in for an audit.
Plus, every penny you pay the tax pro is a fully deductible business expense. That, along with how much more she can lower your tax bill, makes it an expense that pays for itself.
Michele Cagan is a CPA, author, and financial mentor. With more than 20 years of experience, she offers unique insights into personal financial planning, from breaking out of debt and minimizing taxes to maximizing income and building wealth. Michele has written numerous articles and books about personal finance, investing, and accounting, including The Infographic Guide to Personal Finance, Investing 101, Stock Market 101, and Financial Words You Should Know. In addition to her financial know-how, Michele has a not-so-secret love of painting, Star Wars, and chocolate. She lives in Maryland with her son, dogs, cats, and koi. Get more financial guidance from Michele by visiting SingleMomCPA.com.
Photo by Hannah Wei