Tax Help for the Gig Economy

“Gig Economy” is in the news all the time these days. It’s also known as the sharing, on-demand or access economy. What does that term mean? The Gig Economy is a labor market that is made up of short-term contracts or freelance work as opposed to a traditional job as an employee. The Gig Economy can benefit workers and businesses by making work more adaptable to the needs of the moment and demand for flexible lifestyles. At the same time, the gig economy can come with significant downside risk, mostly for workers.

On an interesting side note, the term “Gig Economy” derives from a term used in the 1920s by jazz musicians as a shortened version of the word “engagement.” It now refers to any aspect of musical performance. More broadly, “gigging” means having paid work, often as a freelancer.

In effect, workers in a Gig Economy are more like entrepreneurs than traditional workers. While this may mean greater freedom of choice for the individual worker, it also means more responsibility. The security of a steady job with regular pay, benefits, and a daily routine is rapidly disappearing. Workers must take a much larger share of the economic responsibility for taxes, insurance and other financial obligations that employers usually take care of.

When it comes to taxes, there are a lot of rules and quite a bit to know. How can you keep up with it all? The Internal Revenue Service has created a new Gig Economy Tax Center on its website to help Gig Economy workers meet their tax obligations by getting the information to figure it out, all in one place. Whether renting out a spare bedroom or providing car rides, workers need to understand the rules so they can stay compliant with their taxes and avoid expensive surprises at tax filing time.

Educating Gig Economy workers about their tax obligations is vital because many don’t receive W-2s, 1099s or other information returns for their work in the Gig Economy. However, income from these sources is generally taxable, regardless of whether workers receive information returns or not. Workers who are gigging also need to know about the business expenses they can deduct to reduce their taxable business income.

The IRS’ Gig Economy Tax Center is designed to make it easier for taxpayers to find information about a variety of topics including filing requirements, quarterly estimated income tax payments, and deductible business expenses. But the information can still be daunting. Get help from a qualified tax professional if you don’t feel comfortable navigating it yourself. The IRS can help with that, too. https://www.irs.gov/tax-professionals/choosing-a-tax-professional

New Rules for IRAs

A few weeks ago, I blogged about the IRS rules for Required Minimum Distributions (RMDs) from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Well, throw that one out. On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (aka “Secure Act”) was signed into law. The Secure Act changed several important aspects of IRA distributions and contributions.

One thing hasn’t changed. The new tax law still doesn’t allow untaxed retirement money to remain untaxed indefinitely. RMDs, inherited IRAs and other distribution rules are intended to make sure that Uncle Sam gets his share of taxpayers’ pre-tax retirement savings. The Secure Act changes the timing of when Uncle Sam gets his share.

Here are three major changes from the Secure Act that should you know, even if you aren’t close to retirement age:

  • Required Minimum Distribution (RMD) Age Increase

Under prior tax law, RMDs had to begin no later than April 1 following the year in which a person turned age 70½. For taxpayers who were not already age 70½ by December 31, 2019, the age to start taking RMDs is extended to 72. Distributions don’t have to be postponed to 72; it’s just an option. What’s better – waiting or not – depends on individual circumstances.

  • Contribution Age Restrictions Repealed 

Before the Secure Act, workers over age 70½ were not eligible to make contributions to an IRA. That contribution age limit has been eliminated. Yea! Slight damper on that celebration, though – the same rules about who can and cannot deduct a traditional IRA contribution apply, regardless of age. 

  • Inherited IRA “Stretch Distributions” Eliminated for Non-Spouses

Traditional IRAs that are inherited by someone other than the owner’s spouse can no longer be distributed over the life of the beneficiary. Distributions now must be taken within a ten-year period after inheritance. This new rule eliminates the options for non-spouse beneficiaries to use inherited traditional IRAs as part of his or her own retirement planning.

Tax rules are always changing. The December 2019 Secure Act changed several rules about taking distributions from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Sure¸ taxpayers still can’t allow untaxed retirement money to remain untaxed indefinitely. Conversely, the repeal of the age limit on IRA contributions and other changes could positively impact how retirement distributions are taxed.

Need help figuring out the new rules? Get detailed tax advice that fits your situation from a qualified tax professional. You can find one near you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

New IRS Standard Mileage Rates for 2020

Do you use your personal vehicle for business, charitable, medical or moving purposes? If yes, you could qualify you for an income tax deduction. How much you can deduct and how you report the expense depends on your particular situation. The rules say that qualified deductible vehicle expenses can total the greater of actual expenses or a standard rate. Both expense options are based on the number of miles driven for business, charitable, medical or moving.

Most people choose to use the standard rate because it’s easier and usually results in a larger deduction amount. The standard mileage rate is determined each year by the Internal Revenue Service based on data about the cost of operating and maintaining a vehicle, including passenger cars, vans, pickups and panel trucks.

The IRS recently issued the new standard mileage rates for 2020 to calculate the deductible costs of operating a vehicle for business, charitable, medical or moving purposes. Beginning on January 1, 2020, the standard mileage rates were reduced or stayed the same. Here are the details:
 

  • 57.5 cents per mile driven for business use, down 0.5 cents from the rate for 2019,
  • 17 cents per mile driven for medical or moving purposes, down 3 cents from 2019, and
  • 14 cents per mile driven in service of charitable organizations. The charitable rate is set by statute and remains unchanged.

Even at the lower rates, that standard mileage rate can really add up. Remember that you always have the option of calculating the actual costs of using your vehicle instead of using the standard mileage rates. Also remember that you have to track your mileage by category (e.g., business and personal) for each vehicle no matter which method you use.

Taking vehicle deductions for business, charitable, medical or moving purposes involves a lot of tracking, but the effort can be worth it. There are apps you can put on your phone to help. Once you get your system down, you’ll see that those deductions can add up and reduce the bottom line on your tax bill.

Reflections for 2019 – Plans for 2020

The end of one year and the beginning of another is the perfect time to reflect on and celebrate business and personal accomplishments from 2019. Definitely take time to pause and savor your successes. Reflecting on the goals you achieved in 2019 is also a great time to plan for what you want to achieve in 2020. You know what they say…A goal without a plan is just a dream

Whether you are expanding, launching something new or maintaining the status quo, 2020 will be different than 2019. That means setting new goals and making a new plan. Start by identifying an overarching change or improvement you want by the end of the year. Want higher profits? Increased cash flow? Need a new worker employee or automation? 

Change and improvement don’t happen without a plan to get it done. Follow these three tips to establish a plan that will get you what you want to achieve in 2020:

  • Gather the Numbers

Quantify all the applicable aspects of your goals. This task will require some research and could entail making estimates and assumptions. For example, how much profit growth do you want to achieve? Can you express that growth in dollars and as a percentage? How much would a new worker or automation project cost? How much of that cost would be one-time and how much would be ongoing? The more numbers you can nail down, the better.

  • Be Realistic

Keep market conditions and your resource capacity in mind when setting growth and other goals. It’s important to be realistic in order to ensure that your goals are achievable. Setting unrealistic objectives is not only discouraging, it can result in allocating resources – aka time and money – on activities that are unlikely to succeed. Better to target those resources on realistic, achievable goals.

  • Adjust As Needed

No matter how well you research the numbers and focus on what’s realistic, any view of future events is imperfect. Market conditions and other factors that you depended on when setting your goals could change. Periodically assess progress on meeting your objectives. Are you on track? Why or why not? Based on those answers, you may need to make some adjustments to the goals that you set at the beginning of the year.

The end of 2019 is the perfect time to savor your successes and to plan for what you want to achieve in 2020. Don’t let your goals turn into the dreams you never achieved. Establish a plan for 2020 and turn those dreams into your reality.