Part III: Mind your Business - Nonemployee Compensation
Welcome back and Happy Sunday! As we near the end of our blog series, Have You Filed?, we are going to touch on something that I know a lot of you may wonder about – claiming income for your legal side gigs. So, for the dope dealers, this is not for you…go ahead and log out for me. But if you picked up a side hustle to earn a little extra money this past year or even if it’s your main hustle and you are considered an independent contractor, you should read on. Some examples are if you deliver or drive for DoorDash, Uber Eats, Lyft, Instacart, etc. You will be treated as self-employed – you own your own rideshare/delivery business!
First, do I have to claim this income even though I do not receive a paycheck? Yes! You have to claim all income to the IRS – even if you are not given a physical paystub.
But I do not get a W-2 for my side gigs? How do I claim my extra income? Since you were not getting paid as an employee, you were getting paid as an independent contractor. You did not receive a W-2 but you should have already received a 1099-NEC, which states the amount of nonemployee compensation received from the company over the year. You will most likely not receive a 1099 if you did not make more than $600 because it is not required.
What if I did not receive a form 1099? Yep, you still have to claim what you made – even if it was less than $600. Some companies may not even issue 1099’s even though they are supposed to do so – that’s on them! You still have to claim what you made so go check your direct deposits, add it all up, and claim it!
Moreover, you will be treated as a business owner so you will be claiming self-employment income. This doesn’t necessarily mean that you need to register a business name or incorporate your business so please do not think it is that complicated. It does mean you are able to document expenses in order to reduce your tax liability. That is why it is very important that you document and keep track of your “business expenses” such as supplies and mileage.
How does that work? As a contractor, you have to pay income tax as well as self-employment tax so you will most likely owe taxes, especially if you made a decent amount of money (since none of the money was taxed when it hit your account). If you are fancy and provide a great service to your customers as a driver, you can deduct expenses for things like snacks and drinks for passengers, toll fees, uber or lyft fees, etc. Tracking your mileage is very important and you will need to keep a log of them just in case you are audited by the IRS. You can get the standard mileage deduction (56 cents per mile).
An example is if in 2021 I worked for DoorDash as a delivery driver – I made $1,000 and based on my mileage log, I drove 300 miles. When I deduct my mileage expense of $168 (300 x $0.56), my taxable income will decrease to $832 – which reduces the amount I will owe in taxes. It is a deduction, not a credit.
It seems like a lot but it truly is simple once you understand it all. The secret to a seamless tax filing as an independent contractor is great record-keeping. I did not go into details for those who own their own business, have employees, business expenses, etc. This was intended for those claiming side job income. I hope it helped! Thanks for reading – write to you soon…
--JW