More Americans work in the new, on-demand economy than you might imagine. Companies are essentially tapping into a workforce of talented, independent workers. If you are an on-demand worker, your employer may classify you either as an employee or as an independent contractor. This classification makes a big difference in the benefits you receive, as well as in the tax forms you must file to report money received from on-demand jobs.
Most on-demand workers are Independent contractors
Workers who perform on-demand jobs—like Uber drivers—are usually treated as independent contractors for tax purposes. Independent contractors are not employees, so if this is your classification, your company doesn't pay for benefits or withhold taxes from your income.
Your employer will report your income to you and to the IRS on a Form 1099-NEC, and you're required to report it on your tax return. Use Schedule C, Profit or Loss From Business and include it with your Form 1040 filing. If you receive payments through online payment services such as PayPal, you might receive a 1099-K. Payers will also send these forms to the IRS to report your income.
Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.
Independent contractors take business deductions and pay self-employment tax
If you are working as an independent contractor, for tax purposes, you're essentially in business for yourself. On the Schedule C form, you'll report not just your gross income, but also any business expenses you are taking as tax deductions, including:
- Actual vehicle expenses related to that business, or
- Standard mileage deduction—56 cents a mile in 2021 for business use. For the first half of 2022 the rate is 58.5 cents per mile and increases to 62.5 cents per mile for the last half of 2022.
Self-employed workers pay self-employment tax that covers Social Security and Medicare taxes. You report the tax on Form 1040, but calculate it on Schedule SE Self-Employment Tax.
Robert Jones of San Francisco, California, has made money driving for Uber for several years. "I am always very careful about keeping business records," he says. "I write down the odometer reading every time I get into and out of the car."
Some companies treat on-demand workers as employees
If you are classified by your company as an employee, you'll receive any employee benefits you are eligible for and your share of payroll taxes will be withheld from your salary.
You will also pay less tax. Under the Federal Insurance Contributions Act (FICA), your employer pays:
- Half of your Social Security and Medicare taxes
- Withholds the other half from your pay and sends it to the IRS for you
As an employee, you are likely to have fewer business-related deductions than as an independent contractor, but you can still deduct some business expenses through tax year 2017. Beginning in 2018, these unreimbursed employee expenses are no longer deductible.
Determining classification of on-demand workers
For tax purposes, defining an on-demand worker as an employee or an independent contractor depends on a variety of factors. Usually, the main determining factor is the level of control the employing company enforces—or has the right to enforce—over its workers. The IRS also looks at whether the company:
- Offers benefits
- Sets prices
- Provides supplies
- Reimburses expenses
Sometimes companies decide to treat their on-demand workers as employees for tax purposes, although companies such as Uber, Lyft, Upwork (formerly Elance-oDesk) and LiveOps generally do not. In many cases, the businesses that decide to treat on-demand workers as employees are those with lower worker-to-customer ratios.
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