Are you taking all the deductions you’re due as a gig worker? A recent survey by software maker TaxSlayer says that 40% of gig workers are missing out on tax savings. That’s a huge mistake because, unlike the nearly valueless deductions you can claim as an employee, when you’re self-employed, write-offs can save you a fortune.
Why? When you’re an employee you only get to write off so-called “miscellaneous itemized deductions” when your employer doesn’t reimburse for them, so the expenses are usually insubstantial – things like professional group dues and magazine subscriptions. Even then, miscellaneous itemized deductions for employees can only be used when they exceed 2% of your adjusted gross income. In other words, rarely.
Better write-offs = tax savings
When you work for yourself, the picture is dramatically different.
Any cost you incur – from buying art supplies for your Etsy creations to weekly carwashes to keep your vehicle in shape for your ride sharing clients – are subtracted dollar-for-dollar against your self-employment income. Even meals and entertainment expenses are partially deductible when you are taking out clients or prospective clients. The rules are broad and essentially allow write-offs for any expense that you can justify as being reasonable and necessary for your business. That’s arguably a lot of money — and can dramatically cut the income that you must pay tax on.
What if you have both employment and self-employment income. No worries. Roughly 28% of Americans have two or more sources of income in today’s side hustle world, according to TaxSlayer.
Having a day job doesn’t mean that you lose the tax savings allowable for gig workers.
Here’s what to do:
Fill out the normal 1040 form, showing your wages and tips on line 7, as usual. However, you will also want to fill out a Schedule C. This form allows you to report the profit or loss from your business.
The Schedule C starts with gross receipts — all the money you took in with your side hustle. It then prompts you to detail a wide array of expenses – advertising, car and truck expenses, any commissions and fees you might pay, insurance on your car or home (depending which is being used for business), office expenses, supplies, repairs, taxes and licenses, as well as travel, meals and entertainment. If you lease a vehicle, the portion of the vehicle that’s used for business is deductible. So, let’s say your lease payment is $500 monthly and that car is used 80% for work. Your deduction would amount to $400 monthly, or $4,800 for the year.
Which of your expenses fit into each of these categories? Did you buy business cards; make up fliers; have someone help you start an Instagram or Facebook account? Those could all be advertising expenses. Did you get a Costco membership so that you could stock up on snacks and drinks for your ride share clients? Both the membership and the snacks are deductible under fees and supplies, respectively. Did you attend any conferences to explore other ways to make money or improve your current business? Take out a mentor to discuss how to gain more clients? All of these can be legitimate write-offs for a gig worker.
Notably, the Schedule C doesn’t have a place to deduct your health insurance expenses. But if you buy health insurance for your family, you can also deduct that as a self-employed person. This can provide a huge amount of tax savings for self-employed workers. You claim those costs on Line 29 of the 1040.
Once you’ve added up all of your costs, subtract that amount from your self-employment receipts. Chances are, it’s a much smaller number than you started with. And that’s likely to save you hundreds, if not thousands of dollars on your state and federal income taxes. The net result – your receipts minus all these expenses – is the self-employment income that you now report on Line 12 of the 1040.
Know that you don’t have to provide proof of these deductions when you file your tax return, but do keep any receipts or proof of the costs with your tax records in the off-chance that you’re audited down the road.
If this is something that you don’t want to do yourself, know that every tax software maker has a program that accommodates the self-employed, but make sure the program you buy includes the Schedule C. And also be sure to look for a promo code. Most software makers have deals at this time of year that allow you to get their software for 15% to 20% off.