If you earned $600 or (someone pay you $600) or more, you were not an employee of a company or the person that paid you the $600, you are consider Self-Employed or an Independent Contractor for IRS tax filing. You will have to file Form Schedule C – Profit or Loss From Business.
If someone pay you for work done or perform and they decide to tell IRS, they will issue you a 1099-Misc, 1099-NEC, or a 1099-K. They are required to report payment to vendors over $600 under our tax laws. You now are going to have to file a Schedule C as part of your tax filings.
So, what is Schedule C?
Schedule C is the form the IRS expects Self-Employed, sole proprietors or Independent Contractors to complete and report their income – i.e. Profit and Loss. Only use Schedule C if you are not a Corporation or an Limited Liability Company LLC with more than one member.
Single member LLCs should file Schedule C also. The IRS refer to Single Member LLCs as Disregarded Entity.
Schedule C is the only form use for filing taxes for independent contractors or self-employed individuals. It is widely use and popular with the IRS. It incorporates Home Office Expenses, Business Travel & Meal Expenses, and Mileage Deductions. All these are tax credits and deductions are tax advantages for taxpayers.
Because Schedule C is widely used, it is the most AUDITED SCHEDULE. We tell clients that they should keep good records when it comes to Schedule C filings. Quickbooks Self-Employed is your Bookkeeper. Sign up for QB Self-Employed.
The story we tell most clients especially retirees who volunteer their time at Church or some charitable organization and the organization decides to show appreciation by paying the individual $1,000 or more for his or her time; Guess what? The charitable organization is now obligated to report such payment to the IRS. The only way the organization can tell the IRS they give you $1,000 is by issuing you a 1099-Misc.
You the receipient of the payment now have to include the 1099-Misc. (i.e. income) with his or her filing. You are now self-employed under the IRS rules. You now have to a file Schedule C.
This law does not make sense but that’s the law. Most people who are paid with a 1099-Misc. or 1099-NEC that come to our practice do not keep records. We see this all the time. We strongly recommend QB Self-Employed for Uber, Lyft, Postmates, DoorDash, etc. etc. etc.
However, in additional to filing schedule C, you also will need to file Schedule SE which stands for Self-Employment Tax. The IRS require you to pay 7.5% in Self-Employment Taxes (Schedule SE). So then, the $1,000 or more you did received for voluntary service at a charitable organization will now be tax twice. One for self-employment taxes. The other tax is for ordinary income on your “Net Profit.” The IRS do not like self-employed individuals to show business losses.
(Side note: Between us, the IRS is after self-employment taxes more than anything else.)
What does this means? It means that $1,email@example.com% = $75 SE taxes you owe. Then the $1,000 less $500 business expenese leave you with $500 taxable ordinary income. Let’s caculate your taxes on the $500.
The Federal Tax Rate for oridinary income varies depending on your tax bracket. You can view your tax bracket the 2020-2021 tax season at Bankrate. The $500 income falls under the 10% bracket. Therefore, $500@10% = $50. Now the total taxes you owe on the $1,000 is $125.00. [$75+$50]
This rule is burdensome and can cause lots of headaches | extra work for tax practitioners.
Per the IRS: Gig economy workers are all consider Schedule C filers. The IRS monitors these filings closely.
Let us first look at what is a Gig Work?
A gig work is a certain activity that you do to earn income, often through an app or website (digital platform), like:
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Sell goods online
- Rent equipment
- Provide creative or professional services
- Provide other temporary, on-demand or freelance work
- Note: This list does not include all types of gig work.
What are Digital Platforms?
Digital platforms are businesses that match workers’ services or goods with customers via apps or websites.
This includes businesses that provide access to:
- Ridesharing services
- Delivery services
- Crafts and handmade item marketplaces
- On-demand labor and repair services
- Property and space rentals
You now have to file Schedule C along with whatever form was issued to you by company that employ you. Ridesharing workers usually get form 1099-K.
Taxpayers must report gig economy earnings when filing taxes – Issue Number: Tax Tip 2022-07
Whether it’s a full-time job or just a side hustle, taxpayers must report gig economy earnings on their tax return. Understanding how gig work can affect taxes may sound complicated but, it doesn’t have to be. The IRS offers several resources to help gig economy taxpayers properly fulfill their tax responsibilities.
Here are some things gig workers should keep in mind.
Gig work is taxable:
- Earnings from gig economy work is taxable, regardless of whether an individual receives information returns. The reporting requirement for issuance of Form 1099-K changed for payments received in 2022 to totals exceeding $600, regardless of the total number of transactions. This means some gig workers will now receive an information return. This is true even if the work is full-time, part-time or if an individual is paid in cash.
- Gig workers may also be required to make quarterly estimated income tax payments and pay their share of Social Security and Medicare taxes.
Check worker classification:
- While providing gig economy services, it is important that the taxpayer is correctly classified.
- This means the business, or the platform, must determine whether the individual providing the services is an employee or independent contractor.
- Taxpayers can use the worker classification page on IRS.gov to see how they are classified.
- Independent contractors may be able to deduct business expenses, depending on tax limits and rules. It is important for taxpayers to keep records of their business expenses.
Pay the right amount of taxes throughout the year:
- An employer typically withholds income taxes from their employees’ pay to help cover income taxes their employees owe.
- Gig economy workers who are not considered employees have two ways to cover their income taxes:
- Submit a new From 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.
The Gig Economy Tax Center on IRS.gov answers questions and helps gig economy taxpayers understand their tax responsibilities.
Publication 5369, Gig Economy and your taxes: things to know
Publication 1779, Independent Contractor or Employee
Is My Residential Rental Income Taxable and/or Are My Expenses Deductible?