6 Gig Work Tax Deductions to Maximize Profits for Your Gig Business
Introduction
Starting a new business can be very exciting, but can also be stressful without the proper setup and tools to manage your company. Read our guide to learn about tax problems for sole proprietors, why gig workers should form a Limited Liability Company (L.L.C.), and how to take advantage of gig work tax deductions to make the most of your profits.
When you’re ready to start your gig business, our tax and accounting partners can help you decide which business structure is best for you, and offer affordable tax and accounting solutions. With a registered business and the right tax setup, you can build a successful gig business while protecting your personal assets. Let’s get started!
Sole Proprietor Tax Problems
The greatest disadvantage to doing business as a sole proprietor is that you are personally liable for potential lawsuits and tax liens. If you are sued by a customer or the company you work for, all your personal assets can be seized to satisfy any payouts. Business liability insurance can offer some financial relief, but unless you form a company, there’s no way to separate business assets and protect your personal wealth.
Funding a Gig Work Business Can be a Challenge
You may be able to build a profitable gig business without extra cash. But if you decide to buy new equipment or expand, investors usually like to work with official businesses. They want to make sure that their interests are protected, and that they can recoup their investment in the event of bankruptcy or a lawsuit.
Sole Proprietorships Die With the Owner
Unlike a registered business, a sole proprietorship can’t exist beyond the life of the owner. You can distribute business assets to your heirs with a will, but the business itself is dead. So if you intend to sell or pass your company to the next generation, you must register your gig business as a Limited Liability Company or Corporation.
IRS Tax Audits Can Involve Personal Assets
Forming a company separates business and personal assets. Without the ability to separate business assets, the IRS may consider all your personal assets in potential audits. You may be subject to additional taxes, penalties, and interest if you can’t prove you have already paid tax on the income you earned as a sole proprietor.
Learn how to avoid business failure.
Why Gig Workers Should Form a Limited Liability Company (LLC)
While you don’t have to form a company to be a gig worker, without one you are personally liable if you’re sued, which means personal assets can be wiped out to satisfy judgments. Without a registered business, your personal assets can also be seized to settle tax payments in the event of an audit. Forming an LLC for gig work will separate business and personal assets and provide limited liability protection if you’re ever audited or sued.
4 Reasons Why Gig Workers Should Form an LLC
- Liability protection. Forming an LLC separates business and personal assets. If you’re ever sued or involved in a tax audit, only the business assets can be considered to satisfy judgments and taxes owed.
- Investment opportunities. Investors like to work with official businesses over sole proprietors. If a business can’t repay a loan, it’s easier for investors to secure repayment from an LLC.
- Pass-through taxation. An LLC itself does not file a tax return. Instead, individual owners (members and/or managers) report profits and losses on forms that are filed with personal tax returns. Because the business doesn’t file a separate tax return, owners are only taxed once, instead of at both the corporate and individual levels. Owners are also only taxed on their “membership interest”, or percentage of business ownership.
- Simple and flexible management. In general, an LLC is simpler to manage than a Corporation. Corporations are required to follow more state and federal government guidelines than a Limited Liability Company. You’ll likely have to file an annual or biennial report with your state, and we can file for you with either MyCompanyWorks Premium™ or our Annual Report service to make management and compliance simple.
Reasonable Gig Work Tax Deductions
As a gig worker, the IRS considers your work status as ‘self-employed’. Your tax status is defined by how you organize your company. LLCs can register for “small business” or S-Chapter tax status with the IRS to lower tax rates. Anyone who is self-employed can deduct reasonable business expenses on their tax returns. Certain deductions are limited to the extent that equipment or insurance is used for business, but most insurances, startup costs, phone, internet, travel, marketing, and training expenses are 100% deductible.
Top gig work tax deductions
- LLC formation expenses – filing fees, notary costs, etc.
- Insurance – general liability, workers’ compensation, and vehicle insurance for the time your vehicle is in service.
- Home office expenses – phone, internet, utilities, equipment. Calculate home office deductions here.
- Individual Retirement Plans (IRAs) – you can set up an individual 401(k) if you’re the only business owner.
- Vehicle gas and maintenance expenses – limited to the time your vehicle is being used for business purposes.
- Fees for tax filings – you can write off professional fees and tax return payments.
Get Help with Gig Worker Taxes
You can file your tax returns, but taxes and write-offs can be confusing if you’re new to business. The IRS has a gig worker resource center to help you manage and pay taxes. We also partner with tax and accounting professionals who specialize in helping small businesses and startups. They can manage all your accounting and file tax returns so you can focus on your business. You can also take advantage of exclusive pricing for MyCompanyWorks clients.
Summary
We’ve covered tax problems that sole proprietors face, the top tax deductions for gig workers, and help to file your own tax returns or hire tax and accounting professionals to do the work for you. You don’t have to register a Limited Liability Company (LLC) to start a gig work business, but your personal assets won’t be protected without one. If you plan to expand your business at any point, investors prefer to work with registered businesses instead of sole proprietors, to protect their interests in the event of business failure. It’s also easier to pass down a business if it’s an officially formed company. Forming an LLC separates business and personal assets, so your personal wealth is shielded from lawsuits and tax liens.
Businesses can deduct expenses for the company’s formation, research, business setup, insurance, and even retirement plans and tax fees. You can also deduct expenses related to a home office and using a vehicle for business, as long as you follow the guidelines and limits. If you’d rather work on your business than pay attention to taxes, you can hire a professional to manage taxes and file returns for you. Since their costs can be deducted, it may be worth your time to hand tax matters to an accountant or bookkeeper. Our partners Bookkeeper360 and 1-800-Accountant have worked with gig businesses for years, and offer special pricing to our clients. Contact our partners for a free consultation.
Start an LLC for Your Gig Work Business
Since 2001, MyCompanyWorks has helped tens of thousands of entrepreneurs start and manage their businesses all in one place. You can start an LLC anywhere in the US, and we usually start working on your order within one business day. Read our latest comparison and thousands of 5-star reviews to see why so many startups choose MyCompanyWorks. For help and more information, check out our Startup FAQ page or contact our friendly support team. We’re here to help you start and manage your gig business with helpful resources and affordable solutions. Contact us today!
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