What to Know about Income Taxes and Side Jobs

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Over 55 million Americans are employed by the gig economy, according to the U.S. Bureau of Labor Statistics, with more workers joining every year as new opportunities present themselves. You might be driving for Uber or Lyft after you’re off the clock at your day job, renting out your home on Airbnb or spending your weekends doing odd jobs on TaskRabbit, all to make extra cash. You may even use one of these peer-to-peer services as your main source of income.

However, employees experimenting with these new technology-driven opportunities may sometimes overlook the fact that they are actually running a business. People who dabble in the sharing economy may never earn more than a couple hundred dollars a year, but once your annual income exceeds $600 before expenses or $400 after expenses, federal and state taxes, in addition to local licensing laws, take effect.

Local Business Registration

If you’re a talented craftsman or antiquer, you might be putting your skills to work and selling your goods on peer-to-peer online marketplaces such as Etsy or eBay. Depending on what you sell and where you sell it, running a business out of your home might require special permits or a business license. Check with your city clerk or other official in charge of such things to verify local requirements.

Special registration rules

There may also be special registration rules for your business. For instance, regularly renting out all or part of your home to guests may require you to register it as a hotel — and to pay the local taxes that hotels or bed-and-breakfasts do. However, if you rent your home only once or twice a year while you’re on vacation, you might be exempt. Always check with your city government about the rules that apply to your situation before you make a big business commitment.

Tax implications for my side job

All of the licensing costs, related insurance, advertising and hard costs invested to generate income for a side business are tax-deductible at the federal level. But when it comes to the use of vehicles for your business, depreciation and home office space, you’ll be subject to all the tax rules that apply to any other business.

That means you must keep detailed records, including logs of personal and business mileage and receipts for all expenses. IRS Publication 334 is a must-read — all the way through — before you start your side job.

When it comes to renting your home or property to vacationers, there are different ways of reporting the income, depending on whether you treat the rentals as a business or a hobby. When you are renting the property to several short-term visitors (with an average stay of seven days or less), you might be considered a hotel for federal income tax purposes. This means that the rental must be reported on IRS Schedule C and all profits will be subject to self-employment taxes.

However, there’s good news for people who only rent their property for 14 days or less per year: All of that rental income is generally tax-exempt. Incidentally, if you rent your property to a tenant for 14 days or fewer, any repairs or remodeling the tenant does during that time is exempt from federal taxes as well.

Taking on a side job to make some extra cash can be a financial boon, but it’s not without tax implications. Before diving into the sharing economy, it’s important to consult with a tax professional who can advise you on your individual situation and help you avoid costly mistakes.