Tax matters
You have to pay taxes on every single dollar that you earn. The onus is, therefore, on you to report your total income to your tax department.
Always seek professional tax advice
It is advisable for you to seek professional tax advice before you embark on any side-businesses especially if you have a regular employment.
If you are working full-time and earning a fixed salary from a regular employment, any additional income you earn from your gig work must be included as part of your total taxable income.
Likewise, any expenses you incur while generating this additional side income will also be tax deductible. There needs to be a direct link between the incomes you generate and the expenses you incur to generate this taxable inc0me.
If you are a rideshare driver, your biggest tax deduction will likely come from the miles or kilometer you put on your vehicle.
Find out how to calculate your total tax deduction and what you need to do to document all of this. There are also different allowable tax methods that you can use to claim your mileage for tax purposes.
Home office deduction
If your home is used to do administrative work for your side business (e.g., keep books and records, doing research, schedule appointments), then you may be eligible for tax deductions related to the home office.
Record keeping
Tax law requires all businesses to keep books and records, which may be another task that is unfamiliar to a gig worker. Nonetheless, this must be done to keep track of your incomes and expenses.
Fortunately, there are many accounting solutions out there that do not require knowledge of accounting or being good at numbers.
Always ask for your pay statements and keep them to determine how much money you have earned. You would need to report the total amount earned as income.
Set aside 30% of income for tax liabilities
A good general rule of thumb is to save or set aside about 30% of your income for taxes.
Because there is no tax withholding on a contractor’s gross salary, gig workers usually have to satisfy their tax obligations through the payment of estimated taxes.
Even more challenging than remembering to make estimated tax payments is having the cash on hand to pay them.
If possible, regularly make your tax payments to the tax department based on estimates throughout the financial year. This is super important because a lot of people don’t make regular tax payments. Then they end up owing penalties or payments because they didn’t or can’t pay their estimated taxes.
Any overpayments made based on tax estimates will be credited back to you when you do your yearly tax returns.
You really don’t want to be in a position where you need to make a lump sum tax payment.
Therefore, rather than spending all the money that comes in, it is highly advisable for a gig worker to set aside a set percentage of earnings (e.g., 30%) and paid into a separate bank account.
Contractor or employee
Always determine whether you are a contractor or employee when performing a gig via a platform. In most cases, you are an independent contractor.
Most rideshare platforms will legally consider their drivers as contractors rather than employees.
As contractors, there is no minimum hourly wage, no shift lengths, no penalty rates, and no superannuation or retirement payments.
Contractors are responsible for obtaining and maintaining all insurances needed like professional indemnity insurance.
It means that every time you get a paycheck, it’s gonna be the full amount that you earn before taxes. It’s also tempting to spend all these gross payments.
One of the benefits of being a contractor is all of the deductions that the tax office affords you. Find out what can and can’t be deducted legally for tax purposes and how you can use this to your advantage to minimize the money owed to the tax department. Hence, the need to get good tax advice and planning.
If you are considered an employee of the platform, then there could be different types of state and federal tax deductions including social security and Medicare that you can consider.
Company or sole proprietorship
Just because you’re an owner of a business, you don’t need to start a Limited Liability Company (LLC) or anything like that, just yet.
You can start off as a sole proprietorship. Depending on the nature of your business activities and potential legal liabilities, incorporate a LLC later on when you have a bit more clarity as to your legal obligations and have the money available to form and maintain a LLC, which can be expensive.
The pros and cons of a company structure must be considered in light of your personal circumstances.