The new gig(s) in town
How the changing economy is changing clients
Ann Etter, CPA, MBA, CFP | November 2019 Footnote
Editor's note: Updated October 31, 2019
CPAs specializing in personal income tax preparation are seeing more and more small (and not so small) Schedule C’s as the “gig economy” strengthens. The intersection of side contracting jobs (gigs) with W-2 jobs can create all sorts of interesting questions:
- Should the client claim a home office?
- What expenses should a client be taking on the Schedule C?
- How do I calculate the estimated taxes, especially when I’m not sure what the withholding will be on the client’s W-2?
- How do I educate my clients as to what they should even be tracking?
Grasping the gig economy
The gig economy isn’t a new concept; it has just evolved the idea of an independent contractor. There are a lot of new income opportunities people are embracing that you may or may not be aware of, from chauffeuring with a personal car to grocery shopping to playing video games for an online audience and receiving “donations.”
All told, 36% of U.S. workers are in the gig economy, meaning you have 57 million people who may eventually be your client; and the gig economy is not reserved just for the creatives and avenues like ride-sharing. Gig workers participate in all industries, including finance, health care and construction.
Some professions have always had a mix of W-2 and 1099 income. Performing artists might have five W-2s and five 1099s from various performance opportunities throughout the year. If you have some performing artists in your client list, you are likely already used to allocating mixed expenses, and those clients are likely used to tracking expenses correctly between employee work and contracting work.
What do we do with a professor, though? They have written a textbook and are lecturing at additional schools or conferences and are giving college-level seminars to senior citizens. There is a heavy crossover between employee expenses and gig expenses. How do they handle tracking? Should there be a home office? What about travel?
In the case of a professor who is using a home office for the purposes of writing or preparing lectures to be given to outside audiences, there is no reason not to claim the home office. As long as the room fits the IRS guidelines for a home office, they can take it. One may presume that their on-campus office is for their employee work and the home office is for their contracting work.
Professors tend to buy materials that can work both in the classroom and for their gigs. Many colleges reimburse professors for academic purchases related to the classroom, thus leaving many of the books or research materials paid for by the professor as germane to the gig work. In the cases where expenses are not reimbursed, asking the client what the impetus was for the purchase is often a good way to determine whether the expense belongs on Schedule C or not.
Travel for book research is easily identifiable. But what if the travel is both for the book and the classroom? Often the institution will pay if the travel is job-related. However, in cases where it isn’t, then allocation of expenses will allow your client to take expenses on Schedule C for the book-related portion.
It can be difficult for some people to ascertain what they should track. A list of possible expenses and some small instruction to the client to note why the expense was incurred will make tax time much easier.
For clients whose internet comprises a significant amount of their gig income (online tutoring, web classes), we also allocate portions of those expenses to the Schedule C.
The estimated tax payments combined with withholding can be difficult. Reminding your client to do a “withholding check” at May 31 and/or Aug. 31 can catch problems before the April deadline. A simple check of the withholding on the pay stub against the tax projection done at the time the estimates were prepared will determine whether everything is on track. Doing it before December gives the client time to make up for insufficient withholding or skip the fourth-quarter estimate if they are overpaid.
For clients who are not organized enough or simply do not want to do a check in the middle of the year, I recommend they save 50% of their gig income until the return is completed. It’s important to be clear to them that insufficient estimates may result in penalties, so it is generally less expensive to do the midyear check.
Sometimes the employment work and the gig are easily separable. For instance: A salesperson who drives for a ride-sharing company like Lyft on the weekends, or a librarian who writes books, or a CPA who moonlights as a voiceover artist. In those cases, it’s easy to determine which expenses belong where; however, you may still need to spend time educating your client on what expenses are deductible.
Many people don’t understand they can deduct things like a writing class against their book income. Or that the computer they use solely for voiceover recording is fully deductible against that income. Additionally, many are afraid of claiming a home office in case they get it wrong. Or they try to deduct too much on their Schedule C, thinking that the family trip to Ireland can be written off if they just write a book about it. Education is key here. There are ways to write off part of that trip to Ireland if you are proactive.
Host with the most
Another aspect of the gig economy is the rise of Airbnb and VRBO, where people rent portions of their home or vacation house and receive, sometimes to their surprise, a 1099 for rent at the end of the year. Without some forethought on this, clients can lose out on expenses. And, if you think this is reserved for a select few, estimates put more than 600,000 people playing host on the side.
There are the obvious allocations of mortgage interest, real estate taxes and insurance. There are also obvious expenses like cleaning, if paying someone else to perform this. But what about the new roof? Or the coat of paint they put on the rooms before renting them out? Or the art they hung on the walls? And there are smaller, ongoing items, like linens, soap and food. Often, clients don’t realize all they can deduct in the course of doing business.
There is also a large amount of incorrect information out there. Some clients think they don’t have to report the income. Others think they can deduct the entire cable bill. While there are instances where income is not reportable (14-day rule) or where the cable bill might be fully deductible (the vacation home has de minimis personal use that year), in most cases there will be reporting of all rental income and allocation of expenses.
Asking questions, gathering information is key
Some clients will have multiple gigs and no employment income. In this case, it may be necessary to prepare more than one Schedule C. However, before you get too crazy dividing everything up, look to see if there is a way to combine the activities.
Someone driving for Lyft and Uber, where it’s reported between 1.5 and 2 million Americans drive, needs only one Schedule C to report those. A voiceover artist who also acts for repertory theatre and sings in a pub on weekends can combine all those activities under “Performing Artist.” An artist who works in both oil on canvas and porcelain sculpture can combine both as “Fine Arts.” A professor lecturing at seminars and writing textbooks may be able to combine both under “Educator,” or they may want to separate the two between “Educator” and “Writer.” Simplifying the reporting makes it easier on both you and your client.
The more information we can give our clients ahead of time regarding their gig adventures, the easier it will be to prepare an accurate Schedule C in the spring.
Ann Etter, CPA is a partner at Goodney & Associates, PA in Northfield and is an MNCPA member. She has been a practicing CPA since 2003, specializing in personal income tax and nonprofits. She is a participant in the gig economy, lending her voice to audiobook novels. You may reach her at firstname.lastname@example.org.