Maximizing Expenses and Minimizing Taxes as an On-Demand Worker

Paying taxes is a fact of life. The good news is, if you’re an on-demand or temporary worker, you have more control over when you pay your taxes and how much you owe.

One of the biggest advantages of working for yourself is that you can claim expenses in the course of providing your services. While some of these expenses may be obvious, there are more subtle expenses you can claim too. We’ll let you know about some expenses you can claim, and how to make the most of them. Disclaimer: this should not be construed as legal or financial advice.

Taxes You Need to Pay as an On-Demand, Self-Employed Worker

Broadly speaking, there are three main types of tax you will have to pay as an on-demand worker who is self-employed.

• Self-employment tax is levied on all of your profits (your earnings minus your expenses). It is charged at just over 15%.
• Federal income tax is charged on your income (which for the self-employed is their profits) and is the standard tax paid by all workers in the US. It is charged in various bands once deductions and allowances are taken into account.
• State tax is also charged on your income, less a deduction that varies by state.

If you want a ballpark figure for how much tax you’ll owe, assume it will be between around 25% and 30% of your profit.

Types of Self-Employed Worker

There are various ways to make a living as a self-employed worker.

• Traditional freelancing — traditionally focused around creative professions like designers, writers, developers, photographers, etc.
• Gig marketplaces — Uber, Airbnb, Lyft, Fiverr, TaskRabbit, Postmates, Wonolo, etc.
• Self-Employed — tradesmen, small business owners, and the like.
• Other areas — other side hustles like blogging, selling on Amazon, Etsy or Ebay, affiliate marketing, and other income streams.

In this article, we’re mainly going to cover people working in the gig marketplaces. The types of expenses you can claim do depend on the services you’re providing. For example, someone running an Airbnb can claim for building maintenance costs, but someone driving for Uber can’t. In other words, tailor your expenses to your specific work circumstances, and always speak to your accountant.

Expenses for On-Demand, Gig Marketplace Workers

Explore each of these areas, check your bank statements and earnings to make sure you’re making the most of these expenses.

Fees You Pay to Provide a Service or Carry Out Work

Hardware and Software Fees

Any hardware or software you use to provide services can be deducted, either partially or fully. For example, if you’ve purchased or subscribe to an app, that cost is deductible. Likewise, if you’ve bought a computer, smartphone, or table to help you with work, you can deduct all or part of the cost.

Insurance Costs

If you drive a car for Uber or Lyft, you can deduct a portion of your auto insurance as an expense. If you insure property you rent out via Airbnb, then some portion of your insurance premiums will be deductible. If people come to your place of work to receive a service, you’ll need public liability insurance, which is fully-deductible.

Expenses Specific to the Work You Do

This is a catch-all category which varies depending on exactly what services you provide. For example:

• If you’re a Wonolo worker who has to buy a uniform or specific clothes for work, that’s tax deductible.
• If you’re an Uber or Lyft driver, then the costs of fuelling, maintaining, and repairing your vehicle are deductible (normally as a “per mile” expense), and also parking fees, tolls, and snacks you provide to customers.
• If you run an Airbnb, you can charge for things like cleaning, cable services, a proportion of your utility bills for the rentable property, repairs, and maintenance.
• If you work for TaskRabbit and need to buy tools, other equipment, or services to do work, they’re deductible.
• If you run any part of your business from home, you may be able to deduct a home office expense.
• If you need special training, skills, accreditation, or certification to provide services, you can deduct those costs.

Fees You Pay to Process Payments or Appear on a Marketplace

These expenses are part of the cost of doing business, accepting work through a marketplace, or taking payment.

Gig Marketplace Fees

If you pay fees to use a gig marketplace you can deduct those fees as expenses. For example, Fiverr charges a 20% commission, and marketplaces like Airbnb also levy charges. Note that you cannot apply this twice — for example, Fiverr only pays you earnings after they have taken their 20%, so you can’t claim it as an additional expense on top of what you’ve already earned.

Credit Card, Paypal, and Payment Processing Fees

If you take payment via credit card, debit card, and some other methods, you may be liable for payment processing charges. Some marketplaces will already take this into account, but if not, these fees can typically add up to around 3% of any payment you receive.

Bank Account and Exchange Rate Fees

If you have a business bank account, they may charge you monthly fees or charge you for certain types of transactions. Record all of these charges, as they are all tax deductible. Likewise, if you take payments in a different currency and have to pay to have them converted, that fee is deductible as well.

Other Business Expenses

These are the various other costs you incur to provide services:

Health Insurance

If you pay for your own medical insurance or healthcare premiums, these are normally tax deductible.

Expenses for Promoting Your Business

If you pay for advertising, produce business cards, or use any promotional listings or services, that is all tax deductible.

Travel, Meals, and Entertainment

If you’re spending money to wine and dine customers, travel to their place of work, or otherwise entertain them, then some of those costs may be deductible.

Professional Fees and Miscellaneous Expenses

Costs like office sundries and supplies, membership dues, licenses, etc, are all deductible. You can also expense any money you spend out on professional business services or advice like accountants, bookkeepers, or lawyers. This includes company formation and filing fees if you’re running an LLC. <link to business entity blog post (not written yet.)

Reducing Tax Further by Choosing Voluntary Expenses

There are a few other techniques you can use if you want to claim other expenses and further reduce your tax burden.

Funding a Retirement Account

Certain types of retirement accounts, like the 401(K) or IRA allow you to deduct any contributions from your profits, so you won’t pay tax on them. The downside of this is that you will pay tax when you eventually withdraw that money.

Charitable Donations

Your business can make charitable donations to good causes and deduct those donations from your profits for tax purposes.

How Much of the Expense Can you Deduct?

When it comes to deducting expenses, you can only expense the portion you use to provide your services. For example, if you have a personal cell phone, but you use it for work half the time, you can deduct half the cost of your cell phone plan as an expense. If you drive your car 70% of the time for Uber, you can claim expenses on the wear, tear, and fuel for that 70% (although the standard mileage expense may be better for you).

The only exception to this is the home office deduction, which you can only take if you exclusively use your office for business purposes.

The Importance of Record Keeping for On-Demand Workers

Remember that you will need to be able to prove all of your expenses if you’re audited by the IRS (which  is more common for the self-employed). As a result, you should always keep receipts and be able to backup anything you’re claiming.

Estimated Taxes for On-Demand Workers

If you’re self-employed, you will need to pay estimated taxes, four times a year. Speak to your accountant for details, how much you’ll need to pay, and to whom.

There you have it, our simple guide to expenses for on-demand and temporary workers. Take advantage of these hints and tips, and you could substantially reduce your tax bill.