Income Tax Responsibilities as an Independent Contractor

Taxpayers who engage in the gig or sharing economy, (Uber, Lyft, TaskRabbit, AirBnB, etc.) and others classified as independent contractors have different federal tax responsibilities than someone classified as an employee. Generally, once a taxpayer receives a Form 1099-NEC or Form 1099-MISC with an amount in Box 7, they will have to file their tax returns as an independent contractor.

An independent contractor is considered self-employed and a sole proprietor of a business when they file their tax returns. Independent contractors will file their Form 1040 at the end of the year and will have additional schedules to complete; generally Schedules C and SE will be required. Schedule C is the schedule to report all income and expenses related to being an independent contractor, while Schedule SE is the self-employment tax calculation.

Independent contractors are allowed to deduct all reasonable expenses related to generating income (i.e. gas and insurance for Uber and Lyft Drivers, and necessary tools for TaskRabbit tasks). While taxpayers are not required to include support for their deductions when they file, the IRS suggests that taxpayers keep all tax records, including documentation for all deductions, for three years after their tax return is filed. By keeping good books and records, a taxpayer who is audited will be able to easily substantiate any deductions that the IRS is questioning.

For taxpayers who receive rental income, such as AirBnB and Vrbo hosts, they will receive a Form 1099 at the end of the tax year summarizing all income made during the year. Since this income is rental income, a taxpayer will need to report this income and applicable deductions on their Schedule E, not Schedule C. The rules for deductions and keeping of books and records are the same as income reported on Schedule C.

Taxpayers should consider the following topics when participating in the gig or sharing economy:

• Incorporating: There are various forms a business can be incorporated. By choosing to incorporate, an independent contractor can provide more security for themselves against lawsuits. We recommend consulting with a lawyer who can advise on the needed steps to incorporate.
• Keeping a separate bank account: It is very easy for an independent contractor to mix funds between their personal use and business use. It is strongly recommended that independent contractor open a new bank account to keep personal and business finances separate.
• State Tax Returns: States vary when it comes to the treatment of independent contractor income. Places like the District of Columbia, require a separate business tax return if the income is over a specific threshold regardless of incorporation status, while other states like Maryland only require additional forms on their personal tax return similar to the IRS. Failing to file the correct form or filing a tax return incorrectly can be an expensive mistake.

Learn more about your responsibilities as an independent contractor by scheduling a call with a tax professional.