Tax Basics for On-Demand Self-Employed Workers

By Megan Sullivan

4 min read

You might have recently signed up to be an Uber driver, decided to rent out your home or a portion of it on Airbnb or offered to provide on-demand services from dog walking to errands on sites like Task Rabbit and Zingy Pet. As non-committal as they may seem, these on-demand jobs add intricacies to your tax returns, which can make next April a nightmare filled with late tax payments, forms and headaches.

But don’t fret. We’ll review some of the general tax regulations for on-demand workers with a focus on ride-sharers, home-renters and odd-jobbers.

Filing Your Taxes as an On-Demand Worker

The biggest difference between filing your taxes as an on-demand worker (whom the IRS sees as a sole proprietor) and filing as a full-time employee is that as an on-demand worker, you haven’t had any federal or state taxes withheld from your income.

As a regular employee, when you file your annual return, the taxes you owe the IRS and your state government (if applicable) are paid by you through your employer. If you’re a freelancer or self-employed, taxes aren’t withheld from your check, meaning that you have to track, calculate and initiate your own payments to the IRS.

As an on-demand worker, your tax burden is called the self-employment tax, and covers your contributions to Medicare and Social Security, as well as your IRS tax bill. It’s important to understand that you would pay these same taxes as a regular hired employee; only the name is different.

Deductions

Every industry has different rules outlined by the IRS regarding what is an acceptable deduction. Whenever legally possible, deduct as much as you can. Deductions reflect any out-of-pocket payments made to support your on-demand work. By claiming these expenses as deductions, you are lowering your overall taxable income, which results in lowering the amount of taxes owed.

As an on-demand worker, you should consider working with a professional tax preparer to ensure you are taking all possible deductions and filing the correct forms. It’s best to find a tax professional who has extensive experience with freelancers or non-traditional employees. You can also look into tools such as Quickbooks Self-Employed, which can help you claim deductions as well as prepare the business portion of your tax return.

Filing Your Taxes as an On-Demand Driver (e.g. Uber, Lyft)

The biggest mistakes that almost all on-demand workers make is not taking the proper deductions—or not taking the ones that they’re entitled to. For drivers, deductible expenses will largely be related to the driver’s vehicle. Keep in mind that deductions can only be taken on expenditures made exclusively for your business.

As an on-demand driver, you can deduct one of the following:

In most cases, taking the standard deduction will net you more than adding up individual expenses.

Another challenge associated with filing your taxes is record-keeping. It’s best to keep track of your mileage and expenses in real-time or close to it. Don’t rely on your memory when tax season rolls around; more than likely you’ll miss something, which can hurt your bottom line.

Uber recently started sending its drivers 1099-K and 1099-MISC forms, which reflect the amount of money that is paid to you. Remember that copies of these forms are also sent to the IRS, so it’s in your best interest to declare all of your income.

For in-depth coverage on filing taxes as an on-demand driver, see our tax prep tips for Uber and Lyft drivers.

Filing Your Taxes as a Residential Property Owner

If you rent out a property you own via sites like Airbnb, VRBO or HomeAway.com, you will need to track your income and specific deductions.

For homeowners who rent out their residential property, there are a number of expenses they can deduct. These include:

  • Rental Payments
  • Cleaning
  • Utilities
  • Repairs
  • Taxes
  • Depreciation
  • Management Fees
  • Insurance

One of the benefits for landlords is that the local taxes or other hospitality taxes can be assessed to the customer. This can help the owner pay these costs in a timely manner. Local and hospitality tax collection will vary by local and state jurisdiction, so be sure to consult your local tax laws or contact a lawyer if you have specific questions.

Filing Your Taxes as a Service Provider

If you’ve decided to turn some of your free time into income by offering your services as a dog walker, errand runner or general task master, there are some tax issues you should be aware of. Ultimately, you should follow the regulations for self-employed workers or those with a home-based business. Accounting software like QuickBooks Self-Employed can also help with tax preparation by calculating your tax payments and automating deductions.

If you primarily run errands, you can deduct mileage, similar to Uber drivers. If you purchase dog sitting supplies, such as treats, food and extra water dishes, you can deduct those costs as well.

If you offer specialized talents, such as graphic design or writing, and you work from a home office, you may qualify for a number of home office-related deductions. You can also deduct the cost of your computer, internet service and more if these things are necessary for you to do your work.

For a more in-depth article on the entire process of filing taxes, see our complete guide to taxes for the self-employed.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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