WESTERN CPE BLOG
Providing the latest tax news, information, and updates for tax and finance professionals
Gig Economy Clients: Tax Prep Challenges and Solutions for AFSP Preparers
The IRS defines the gig economy as “activity where people earn income providing on-demand work, services or goods, often through a digital platform.” In 2023 alone, 64 million people worked in the gig economy. As an Annual Filing Season Program (AFSP) participant, you’re bound to run into clients earning income through the gig economy. These clients can often have trouble with tracking their expenses, knowing how often to pay their taxes, and what their obligations are. Much like the gig economy, these clients are always in flux. We’ll be exploring the challenges that gig economy clients present and the solutions that you can implement to make gig economy clients an integral part of your tax preparation gig.
Basic Tax Obligations
What is the challenge? Many new gig workers don’t understand their tax obligations when transitioning from traditional employment.
Solution: Create a tax checklist explaining that clients must file a return if they have net earnings from self-employment of $400 or more from gig work, even if it’s a side job. Since gig economy clients are independent contractors, the IRS stipulates that these clients must pay their own taxes rather than having an employer withhold them. Direct them to Form 1040-ES for calculating estimated taxes.
Income Reporting Gaps
What is the challenge? Gig workers often don’t receive traditional W-2s, and platforms have inconsistent 1099 issuance practices.
Solution: During initial consultations, emphasize the IRS requirement that all gig economy income must be reported on tax returns. IRS materials specify that income is taxable even if it’s from part-time work, not reported on forms like 1099-K or 1099-NEC, or paid in cash, property, or goods. While the platforms that gig clients work on should send forms by January 31st, advise clients to track all income independently. This applies to driving for rideshare, renting property, completing tasks, selling online, and providing services. The more accurate the record of their income, the better you’ll be able to serve them.
Self-Employment Taxation is Often Confusing
What is the challenge? First-time gig workers often don’t realize they must pay self-employment tax covering, including Social Security and Medicare taxes.
Solution: Gig workers must pay tax on all income earned from gig work. When helping clients understand their tax obligations, point them to Schedule SE (Form 1040), which the IRS specifically mentions is required for self-employment tax calculation. AFSP preparers should consult IRS Publication 334 (Tax Guide for Small Business), which is specifically referenced in the IRS gig economy materials, to research and explain how self-employment tax works for gig economy workers. Gig work clients can deduct half of their self-employment tax on Schedule C (Form 1040), which helps reduce their income tax burden.
Quarterly Estimated Tax Payments
What is the challenge? Gig workers frequently miss quarterly estimated tax payments, leading to penalties when filing annual returns.
Solution: Create a quarterly tax calendar featuring the IRS-specified deadlines:
- April 15
- June 15
- September 15
- January 15.
These payments are required if clients expect to owe $1,000 or more at filing time. For clients who also work traditional jobs, highlight the IRS-suggested alternative: increasing withholding from employee paychecks using the Tax Withholding Estimator rather than making separate estimated payments.
Inadequate Recordkeeping
What is the challenge? Gig workers often mix personal and business expenses and lack proper documentation, resulting in missed deductions.
Solution: Tell your clients to keep the receipt! Collecting and keeping records and receipts year-round should be a priority for gig economy clients who will always want to maximize deductions. When discussing deductions, explain that proper documentation helps substantiate business expenses that can lower tax liability. Some documentation examples include account statements, invoices, and petty cash slips. Give them guidance on how they might best document their expenses and income by compiling them electronically for ease of filing.
Home Office and Vehicle Expenses
What is the challenge? Claiming home office and vehicle deductions requires detailed documentation that gig workers typically lack.
Solution: Working from home is convenient but knowing when your home office can count as a deduction can get a little messy. Explain to your clients that they should document: the square footage of their home office space compared to their entire home, photos showing exclusive business use, home-related expenses (mortgage/rent, utilities, insurance, repairs), and the percentage of these expenses allocated to business use.
Vehicle documentation should include: a mileage log with dates, destinations, purpose of trips, beginning/ending odometer readings, and receipts for actual expenses if not using the standard mileage rate. It is most important to keep a personal mileage log. Uber and Lyft keep logs of a driver’s mileage on through their applications, but this may not satisfy IRS requirements. For more information on specific recordkeeping requirements related to vehicle expenses, see Publication 463.
All these deductions must be claimed in Schedule C (Form 1040).
Clients Working on Multiple Gig Platforms
What is the challenge? Clients working across multiple platforms face complex reporting questions and often fail to consolidate their gig income properly.
Solution: Consolidating all income and expense reporting from multiple platforms can be a huge hassle for your gig economy clients. Publication 334 explains that:
- Each self-employment activity should be reported on a separate Schedule C if they’re different types of businesses.
- Similar activities can be combined on one Schedule C.
- Expenses must be properly allocated between different business activities.
To help clients consolidate documentation from multiple platforms, create a simple income tracking spreadsheet with separate columns for each platform but consistent income and expense categories across all sources. This allows clients to maintain separate records by platform while giving you a consolidated view for tax return preparation. Have clients commit to a monthly schedule for downloading and categorizing all platform statements.
Ready to Make Gig Clients a Part of Your Gig?
The gig economy is only set to grow, along with its workforce. With this growth comes an opportunity to capitalize on a market outside of the standard April 15th deadline. By diversifying your client base with gig economy clients, you’ll be tapping into a new income source for your practice. As an AFSP participant, you’re in the perfect position to help gig economy clients with their taxation needs, and now you’re more equipped than ever to help serve them.
-
Self-StudyError-Proofing Excel Spreadsheets
$145.00 – $175.00 Select options This product has multiple variants. The options may be chosen on the product page -
Self-StudyTravel, Entertainment, & Auto Rules
$375.00 – $415.00 Select options This product has multiple variants. The options may be chosen on the product page -
Self-StudyAccounting Best Practices
$336.00 – $376.00 Select options This product has multiple variants. The options may be chosen on the product page -
-
Sale!Bundles
The “Catch the Deception If You Can” Bundle
From: Original price was: $98.00.$72.00Current price is: $72.00. Select options -
Sale!Bundles
Catch, Deter, Defeat: The Aaron Denbo Fraud Series
From: Original price was: $98.00.$72.00Current price is: $72.00. Select options -
-
