Side Gig Superheroes – Keep More Of That Hard-Earned Cash, But Don’t Forget To Pay The Tax Man!
one or more New Year’s Resolutions – whether it’s hitting the gym more frequently, improving your diet, reducing debt, taking that relaxing vacation you’ve been daydreaming about, or simply purchasing that brand-new home you’ve been saving up for. Inevitably, in the few days it will take for you to get used to typing 2020 without having to backspace ‘19’ and enter ‘20’ in the new year, you’ll likely be inundated with emails, advertisements, and blog posts (like this one) reminding you that you have until April 15, 2020 to file your 2019 individual federal tax return.ust like that: 2020 is here – and January is halfway over. If you’re like most people, you’re probably resolving to stick to
But what if you didn’t work a single day last year? In fact, what if you spent most of 2019 creating YouTube videos showcasing your rendition of Baby Shark, posting photos on Instagram promoting that new makeup line you’ve been using, or recording your rendition of the elephant toothpaste experiment on TikTok. Suddenly it happened: that video you posted on YouTube while vacationing in Greece went viral – and the checks started rolling in. Sweet! Congratulations: you’re now a self-made boss!
You’ve probably heard some buzz surrounding whether you’re supposed to be reporting this income and paying taxes to the IRS. The answer is a definitive, undeniable, and resounding – YES! Straight from the horse’s mouth: here’s what the IRS has to say about self-employment.
Here’s the deal:
Whether or not you intended to, you became self-employed (at least, partially) when you started receiving compensation for your side gigs – things like driving/delivering for one of the rideshare companies, or creating and sharing content on social media for the rest of the world to indulge in. Sure, you might also have a day job with a “real” paycheck, from an employer. This simply means that the compensation you’ve received from side gigs is a secondary source of “self-employment income”. And unless you’re a bona fide employee of any of those companies (and waiting on a W-2 each year), this self-employed income is generally reported to the IRS as “non-employee compensation,” and you may receive one or more Forms 1099-MISC or 1099-K instead of a W-2. In most cases, you will be expected to report this self-employment income on your tax return, which is subject to income tax and self-employment tax.
How Do I Know If I Am Required to File a Tax Return?
Most companies will issue a Form 1099-MISC to independent contractors (aka “self-employed individuals”) once they’ve paid you more than $600 in a calendar year (January – December). However, while you may not always receive a 1099-MISC, you are still required and expected to report all amounts received from all sources, as those cash receipts are considered reportable income on your tax return. The same also typically applies to non-cash compensation received from a sponsor. These non-cash goods include things such as fee product samples, branded clothing from your sponsor that you get to keep, travel paid for by those sponsors in consideration for your shoutouts and recommendations, mediums of transportation (e.g., cars, bikes, scooters) that you receive and get to keep, personal services (haircuts, gym memberships, food delivery services in lieu of cash), and other forms of non-monetary compensation.
Great – So What Does All This Mean For ME?
Before you panic, this would be an appropriate time to tell you that as a self-employed – social media influencer, rideshare driver, dog walker, courier, freelancer, etc. – you may be able to write off a wide variety of expenses incurred in the ordinary course of business that are necessary for the successful operation of your side hustle. Think about it: chances are, you wouldn’t be spending your money on things if you weren’t actually seeing a return on those investments. In fact, by the time you deduct legitimate business expenses from the payments reflected on those Forms 1099-MISC (or 1099-K), your self-employment and income tax liabilities might be much lower than you might think.
For starters, if you haven’t already done so, you will want to begin keeping very detailed financial records to include expenses you’ve incurred while capitalizing on your status as a social media influencer to make money. These expenses might include that high-resolution digital camera you realized produced much higher quality videos and photos than your cell phone ever would. Expenses could also include those frequent trips you take to the car wash every week to keep your cleanliness rating up on the rideshare platforms. Don’t forget about that video editing software application you subscribed to which made it easier to splice the best parts of the many different “takes” you shot while chronicling your world travels sponsored by that famous cosmetics company. And these are just a few of the expenses that come to mind.
There is quite a range of expense categories that you (or, more likely, your tax accountant) should be mindful of when figuring out the most effective ways to maximize your business deductions, reduce your self-employment taxes, and lower your overall tax bill. The table below lists a good number of these categories – some which may or may not be applicable to your unique situation. Don’t be surprised if this list inspires you to think of other items or categories that might not be mentioned below or throughout this article. (Can you imagine what the cleaning fee must have been after that elephant toothpaste experiment?)
But…I Was Just Doing This For Fun!
Just because you weren’t expecting to make money by becoming an influential personality on social media doesn’t mean you won’t have to report this income on your tax return. In fact, as we shared with you in our recent post, the IRS has graciously provided some guidance on its website to help gig workers make it easier to file and pay taxes. Now for the double whammy: while you are required to report your income from all sources, regardless of whether your activities are derived from a true business activity or merely a hobby, you are limited in how much, if any, of your hobby-related expenses can actually be deducted on your tax return. Legitimate business expenses on the other hand, are almost always fully deductible – even if your expenses exceed your income (leading you to have an overall net loss, and not a gain). Thus, while you might not have actually ventured onto social media with the goal of running your own business, and thought that being a rideshare driver on the weekends wasn’t going to make you rich, you’ll see rather quickly, the advantages of legitimizing your activities as a business. (That is, unless you’d rather pay more in income taxes. Disclaimer: you’ll want to talk to a tax accountant about this for more specific guidance).
Can I Just Pretend I Didn’t Know I Had To Do Any of This and Hope It All Goes Away?
If you’ve never been chosen by the IRS for one of its infamous audits, it can be very tempting to ignore filing your taxes on time, or underreporting your income in the hopes that they never figure it out. In the past, this strategy might have worked. However, the same technology that made it possible to make money on these side gigs is making it easier for the IRS to use predictive analytics and cognitive technologies to figure out who’s playing by the rules, and who’s trying to get away with tax evasion (a felony). A word of advice: ALWAYS file your tax returns – and pay your taxes when they become due. Oh, and one more thing, if you think you’ll owe more than $1,000 in taxes in a given year, you’ll be expected to make estimated tax payments each quarter.
Where Do I Begin?
The goal of most business entities is to stay in business and avoid bankruptcy. By earning the coveted distinction of being a social media influencer and becoming “self-made”, you have essentially created a business of your own. You are your own brand. And if you’re really good at what you do, you might even find yourself in a position to hire employees, create jobs, and make a name for yourself among your community. It may be safe to assume that you will want to continue making money from social media activities for as long as you can. It is for this and many other reasons that you should treat your business with the same prudence and diligence as you would your personal (self-made) brand.
For most, the task of tracking business expense receipts may seem daunting. Luckily, there are some innovative apps that help to simplify this work and even lighten your burden. QuickBooks: Self-Employed is one such tool – it can help you keep track things like those rideshare miles you drive every weekend, income generated from those viral videos, expenses incurred upgrading your recording gear, and estimate quarterly payments for self-employment taxes. You can also run reports, send invoices to corporate sponsors you might have signed contracts with, and accept electronic payments from your business partners and donors.
Another option to consider are consulting services from your favorite trusted business advisor. Today, getting the advice of a qualified accountant and consultant is much more affordable than it was over the last decade. At Xerebro, our mission is clear: “We serve to be the leading trusted business advisor for the next generation of self-employed entrepreneurs, startup companies, and small businesses by delivering world-class professional services that are economical, impactful and smart.”