In 2014, more than 2.5 million Americans earned income through on-demand platforms such as Airbnb Inc., Lyft Inc., and Etsy Inc. Researchers at American University recently conducted a study that found that more than two-thirds of those who earned income from these peer-to-peer platforms never received a statement of their earnings at the end of the year. Many of the 40,000 surveyed members of the National Association of the Self Employed were confused about when, how, or whether to report their earnings on their yearly tax returns.
Lyft drivers, Etsy sellers, and similar professionals must calculate and pay their own taxes at the end of the year, since they don’t withhold any taxes from their monthly pay. Typically, an independent contractor will receive the 1099 tax form that summarize their earnings throughout the year, which they use to calculate and file taxes. However, in certain situations a 1099 will never be sent, and things can become tricky.
For example, Lyft drivers will receive the IRS Form 1099-K summarizing the income earned while offering rides, but ONLY if a driver made more than 200 of these transactions and grossed more than $20,000 through credit card payments. Drivers may also receive the 1099-MISC which summarizes non-employee compensation, such as driver referrals. Drivers that do not meet the 200 or more transaction or $20,000 earned income minimum to receive a 1099-K still need to self-report earnings and expenses using the Schedule C Form.
Think this all sounds pretty complicated? We haven’t even mentioned paying quarterly estimated taxes or understanding the self-employment tax process. Although it may seem impossible to keep everything straight, all it takes to become a master of independent contractor taxes is a little research, organization, and planning.
To help get you started, we’ve compiled some tips for people who are earning extra income through these peer-to-peer platforms and might be confused about their tax liability.
- Utilize the IRS Tax Withholdings Calculator– For many employees the Withholding Calculator can help avoid having too much or too little Federal income tax withheld from your pay. If you will owe self-employment tax or certain other taxes, use the instructions in Pub 505, Tax Withholding and Estimated Tax.
- Know Your Tax Forms: The Quickbooks website features an amazing resource for self-employed professionals that discuss tax forms and the situations they apply to in detail. The IRS website also features a Tax Guide for Small Businesses that has detailed information on filing and paying taxes, business expenses, due dates, and much more.
- Use Accounting Software: Accounting software or online bookkeeping can help self-employed people or people earning extra income from peer to peer business platforms separate their personal and business expenses, automate deductions, calculate estimated taxes, and more. That way, when April comes around, you’ll be totally prepared to file your taxes and avoid any IRS penalties for underreported income. Use reliable tax software like QuickBooks Self-Employed to help get your books in order throughout the year if you do not anticipate receiving a 1099 from your employer.
- Consult a tax professional- Every individual tax situation is different, so consulting a tax attorney in San Jose or in your local area for tax planning services is a great place to start. Additionally, your employer/platform should have a tax guide of some sort for new employees. Make sure to read all the fine print and ask questions about anything that is confusing.
As an experienced tax attorney in San Jose, I can say that being organized and prepared for tax time can make the process much less complicated. We offer help with delinquent tax situations for income, payroll, and self-employment taxes.