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On-Demand Jobs and Your Taxes

Updated for Tax Year 2015


OVERVIEW

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

On demand worker

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-MISC, and you're required to report it on your tax return. Use Schedule C, Profit or Loss From Business or — if you meet the qualifications for the simpler form — Schedule C-EZ, Net Profit From Business. Whichever of these two schedules you choose, attach it to your Form 1040.

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 — 57.5 cents a mile in 2015 for business use

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 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 paycheck and sends them 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.

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, 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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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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