Don’t make these two money mistakes.
As a personal finance coach, I often have clients who need to create some extra income, at least on a temporary basis. Working in the “gig economy” has become a popular side hustle to make extra money.
The gig economy refers to work where you are an independent contractor (as opposed to an employee), who accepts assignments when you are available to complete them.
An example is WeGoLook, where you go take photos for insurance claims using their phone app. They notify you of the availability of a “look” as they call it, in the app. You can claim the job (if someone else doesn’t beat you to it) or ignore it, based on the location and other requirements. You take the photos, submit them in their app, and get paid for doing so.
Another well-known example is Uber. After being approved as an Uber driver, you decide when you are available to work and indicate that in the Uber phone app. Then you accept individual assignments (driving people places), complete them, and Uber then pays you.
You have to understand that when you become an Uber driver, or a “looker” for WeGoLook, or whatever it is, you own a business. You are now self-employed and there are certain requirements you have to meet.
While the extra income from the gig economy can be very useful, many people make a couple of key mistakes.
1. The first big mistake: Not understanding your gig economy expenses or calculating your profit
As discussed below, you are taxed on your profits, not your gross revenue (the amount Uber pays you). So what is your profit? It’s your revenue minus your expenses.
What are your expenses?
Well it depends on the type of work, but for most of these gig deals, your biggest expense is mileage on your personal vehicle.
You MUST MUST MUST track the miles you drive for these gigs. It’s quite simple to keep a clipboard in your car to record the date, destination, starting mileage, ending mileage and total and cumulative mileage.
Depending on the company you use, the app itself might track the miles for you, or there are other independent apps out there to help with that, like MileIQ. But a simple clipboard and pen is really all you need.
You can deduct 58 cents per mile (and that’s roundtrip miles) as an expense. That is the rate set by the IRS (for 2019) to cover your gasoline and all your other vehicle expenses such as wear and tear, oil changes, etc.
You cannot take the mileage deduction AND count your gasoline, oil, repairs, etc. as a separate expense. It doesn’t work that way. Take the mileage deduction....it’s less work, and it’s a good deal.
Another related mistake I see people make all the time is accepting gigs where they are actually LOSING money by performing the job.
You might think that, because your car gets great mileage, that 58 cents/mile is really high and your actual costs are much lower. That may or may not be true because you can’t accurately predict your costs like car repairs and the like as easily as you can your mpg.
So you may be tempted to take a gig that will pay you $25, but you will end up driving 50 miles round trip to complete it. Your mileage expense would be 50 X .58, or $29. So you just spent $29 to make $25. Not smart.
A good rule of thumb is to know your breakeven point on mileage expense and never accept a job that doesn’t pay more than that.
For most people, that means the one-way mileage to the gig (which the app may tell you before you accept it) is at least equal to the pay, or maybe just a couple dollars less. That still doesn’t give you much profit, but again if your car is super fuel efficient it may be OK.
You only pay tax on your profit, so the high mileage expense will mean you have little profit to be taxed on. The flip side is that if you never show a profit, the IRS might deem your gig economy business as a hobby instead and disallow all your expenses.
How to calculate your quarterly profit:
Total up your gross revenue for the quarter (money paid to you by Uber, Lyft, WeGoLook or whoever).
Subtract any direct expenses (other than vehicle expenses). These will vary greatly depending on the type of work, and you may not really have any.
Then tally up the mileage driven for that business in the quarter, and multiply that by 0.58 to get the dollar expense for mileage.
Subtract that mileage expense as well. The remainder is profit for the quarter. Then see below for what to do with that figure.
2. The second big mistake: Failing to plan for taxes.
First and foremost is that you will owe taxes on your profits. Uber, or WeGoLook, or Takl, or Lyft, or whatever company you sign up with, does NOT withhold taxes and submit them to the IRS or other taxing authority for you. That’s YOUR responsibility as a gig economy business owner.
What taxes will you owe?
a. Income taxes. Duh. Federal, state (if your state has an income tax), and local (which is 1% in most places). And you need to pay them quarterly, based on your estimated profits for the quarter. A good rule of thumb for how much to set aside for all 3 income taxes is 12 to 15% of your profit.
b. Self employment tax. Many who do understand they have to pay income tax often don’t know that they ALSO have to pay self-employment tax to the IRS. This is the equivalent of the Social Security and Medicare payroll taxes that you and your employer pay when you are a regular W2 employee. Your employer pays half and you pay half. But when you are self-employed, you pay it ALL, and it adds up to over 15% (yes, over and above income tax). Now, that’s 15% of your profit, not your gross revenue, but it’s still a big hit that many gig workers are not even aware of until they file their tax return.
How to calculate your quarterly tax estimates:
Using the profit figure you calculated in the last section, you should pay
1% of that profit to your local municipality,
whatever % to your state if there is an income tax (I’m in Pennsylvania and it’s 3.07% here),
and at least 15% to the IRS....more depending on the tax bracket you are in, which will depend on what other income you have. Most people will likely pay about 25% to the IRS.
Estimates don’t have to be exact or perfect. The point is to not wait until April 15th and not have paid anything throughout the prior year. To do so would be to risk owing so much that you incur penalties, and even worse to not have that money set aside and have it available to pay the taxes.
P.S. Actually there’s one more mistake that some people make, and it’s strictly due to laziness. They pay their quarterly tax estimates but they just pay it based on their gross revenues instead of calculating their profits.
That means they pay much more in estimated taxes than they need to. Yes they get it back as a refund when they file their tax returns. But don’t go lending money to the government unnecessarily just to get it back a year later with zero interest. That’s just dumb.
So if you need more money, get out there and make some. But be smart about it. If you need more help with this topic, schedule a complimentary consultation with me on my website at www.moneycoachbev.com.