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2021 Gig Economy Tax Updates
2021 Gig Economy Tax Updates
If you're working in the gig economy, it is important to know your tax obligations.
Making money from a gig economy activity is generally taxable even if you don't receive a Form 1099, or other income statement from the payer.
The 2020 Rideshare Driver Tax Guide provides an excellent overview of tax forms, reporting documents, deductions, and record-keeping requirements specifically related to the gig economy.
However, there are a few important tax updates that gig workers should be aware of for 2021.
IRS Letters 6475 and 6419
Taxpayers who received Economic Impact Payments (EIP) or Advanced Child Tax Credit (ACTC) Payments in 2021 should receive Letter 6475 and/or Letter 6419. These letters help taxpayers, or their tax professionals prepare their 2021 federal tax return accurately.
If the wrong amounts are reported, the IRS will typically correct the refund and notify the taxpayer, but keep in mind that errors can cause delays to your processing time.
You may also view the total of your first, second and third Economic Impact Payment amounts under the Tax Records page in your IRS online account.
Errors & Omissions May Cause Lengthy Delays
The IRS has approximately 24 million unprocessed returns in its backlog. This year, the agency stressed the importance of waiting until you have all the required tax documents to file a complete and accurate tax return.
A simple error, mismatch, or omission may require manual review and delay your return for weeks, even months.
Be sure to gather all documents and verify bank account information. Carefully review the details of your return with your tax professional before signing.
Not sure if you’re missing forms? A Wage and Income Transcript shows data the IRS received such as Forms W-2, 1098, 1099, and 5498. It can be requested through your online account.
Unemployment Compensation Fully Taxable
The American Rescue Plan Act allowed taxpayers under certain income thresholds to exclude up to $10,200 of unemployment compensation from their taxable income in 2020.
Congress did not extend that federal tax break on jobless benefits for 2021. All unemployment compensation received in 2021 is fully taxable. In most cases, taxpayers can access their required tax documentation through their state unemployment portal.
Unemployment compensation does not qualify as “earned income” for the Earned Income Tax Credit and the Additional Child Tax credit. This can reduce the credits you typically receive. However, congress passed a “lookback” rule that may help taxpayers who made less in 2020 and 2021 qualify for a larger credit.
2019 “Lookback” Rule
Taxpayers who saw a reduction in their 2021 earned income may benefit from using their 2019 earned income to calculate the Earned Income Credit (EIC) or Additional Child Tax Credit (ACTC) on their 2021 tax return.
Keep in mind that utilizing the lookback rule does not always benefit the taxpayer. In some cases, this option reduces the amount of credit received. If you qualify, test both options in your tax software or ask your preparer to do so.
Credits for Sick Leave and Family Leave for Self-Employed Individuals
The American Rescue Plan Act featured these refundable credits for eligible self-employed individuals. The credit amounts are based on the prior year’s self-employment earnings and the number of qualified days between January 1, 2021, and March 31, 2021 (Part 1) and the new qualified sick and family leave credits apply to the period April 1, 2021, through September 30, 2021 (Part 2).
This credit could be worth hundreds or thousands to gig workers who lost income due to the following reasons provided by the IRS:
You were subject to a federal, state, or local quarantine or isolation order related to COVID-19.
You were advised by a health care provider to self-quarantine due to concerns related to COVID-19.
You were experiencing symptoms of COVID-19 and seeking a medical diagnosis of COVID-19.
You were caring for an individual who was subject to a federal, state, or local quarantine or isolation order related to COVID-19.
You were caring for an individual who had been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
You were caring for a son or daughter because the school or place of care for that child was closed or the childcare provider for that child was unavailable due to COVID-19 precautions.
Learn More: Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: Specific Provisions Related to Self-Employed Individuals If you're working in the gig economy, it is important to know your tax obligations.
What kind of records should i keep?
What kind of records should i keep?
You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. The business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checking account is the main source for entries in the business books.
Some businesses choose to use electronic accounting software programs or some other type of electronic system to capture and organize their records. The electronic accounting software program or electronic system you choose should meet the same basic recordkeeping principles mentioned above. All requirements that apply to hard copy books and records also apply to electronic records. For more detailed information refer to Publication 583, Starting a Business and Keeping Records.
Supporting Business Documents
Supporting Business Documents
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.
The following are some of the types of records you should keep:
Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
Cash register tapes
Deposit information (cash and credit sales)
Receipt books
Invoices
Forms 1099-MISC
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item to show that the amount was for purchases. Documents for purchases include the following:
Canceled checks or other documents reflecting proof of payment/electronic funds transferred
Cash register tape receipts
Credit card receipts and statements
Invoices
Note: A combination of supporting documents may be needed to substantiate all elements of the purchase.
Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was for a business expense. Documents for expenses include the following:
Canceled checks or other documents reflecting proof of payment/electronic funds transferred
Cash register tape receipts
Account statements
Credit card receipts and statements
Invoices
Note: A combination of supporting documents may be needed to substantiate all elements of the expense.
Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses. For additional information, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:
When and how you acquired the assets
Purchase price
Cost of any improvements
Section 179 deduction taken
Deductions taken for depreciation
Deductions taken for casualty losses, such as losses resulting from fires or storms
How you used the asset
When and how you disposed of the asset
Selling price
Expenses of sale
The following documents may show this information.
Purchase and sales invoices
Real estate closing statements
Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
Employment taxes
There are specific employment tax records you must keep. Keep all records of employment for at least four years. For additional information, refer to Recordkeeping for Employers and Publication 15, Circular E Employers Tax Guide.
Source: Article originally posted by IRS.
Advance Child Tax Credit Payment in 2021 - Should you opt-out?
Advance Child Tax Credit Payment in 2021 - Should you opt-out?
Here are some quick updates on the upcoming Advance Child Tax Credit Payments that will begin on July 15th.
The child tax credit limit was raised for 2021. If you qualify for these payments, you have TWO options:
1. You can receive advanced payments of these credits from July to December instead of waiting for your 2021 tax return.
Non-Filers: Click HERE to Submit Your Information to the IRS
2. You can choose to opt-out of advanced payments. The deadline to opt-out of July's payment has already passed, but we'll provide the link to opt-out of future payments as well as the deadlines below.
Click HERE to Unenroll From Advance Payments
Why might you want to opt-out? (via The Ascent)
You know you're likely to have a large tax bill due for 2021 and would prefer to leave the Child Tax Credit "on account" to help cover the expected tax bill. For example, if you're self-employed and concerned that you're not keeping enough out to cover taxes, the Child Tax Credit could help.
Your child is moving into adulthood, and you would like to hand the funds to them in one lump sum at tax time.
You have a considerable expense coming up next year and would like to "save" the Child Tax Credit to pay for it.
You're adding a new child to your family between now and the end of the year and don't want to go through the hassle of updating your number of children with the IRS.
Here are a few general examples provided by our tax software service provider. We want our clients to know that these advanced payments may impact the return you're used to seeing so that you can make an informed decision about how you proceed.
1. Taxpayer is married with 2 kids, 10 and 14 years old. The taxpayer’s taxable income is $35,000, the taxpayer typically receives a refund of $2,000 to $3,000 due to the Child Tax Credit and the Earned Income Credit.
If the taxpayer does not Unenroll from Advance Payments, the potential Child Tax Credit of $3,000 (for two children) will be spread out over the rest of this year. The taxpayer will receive Advance Payments of $500 a month until December.
When the taxpayer’s 2021 return is filed the refund will be reduced by the total amount of Advance Child Tax Credit Payments received and they might only receive a $1,000 refund or less.
2. Taxpayer is Head of Household with 3 kids, 15, 11, and 8 years old. The taxpayer’s taxable income is $100,000. The taxpayer typically receives a refund of $200 because the taxpayer minimizes the amount of tax withheld from their paycheck to cover the tax owed.
If the taxpayer does not Unenroll from Advance Payments, the potential Advanced Payments will be $750 a month through December. The advanced payment will be $4,500.
When the taxpayer’s 2021 return is filed the refund will be reduced by the total amount of Advance Child Tax Credit Payments received and they will likely owe the IRS $1,500.
So you can see that receiving the Advance Child Tax Credit Payments may or may not be the best option for you depending on your tax situation.
Opt-Out Deadlines & Payment Dates for Monthly Child Tax Credit Payments (via Kiplinger)
Payment Date: July 15, 2021
Opt-Out Deadline: June 28th, 2021
Payment Date: August 13, 2021
Opt-Out Deadline: August 2, 2021
Payment Date: September 15, 2021
Opt-Out Deadline: August 30, 2021
Payment Date: October 15, 2021
Opt-Out Deadline: October 4th, 2021
Payment Date: November 15, 2021
Opt-Out Deadline: November 1, 2021
Payment Date: December 15, 2021
Opt-Out Deadline: November 29, 2021
We hope this helps! The IRS is the best resource for the most current and accurate information.
2021 Child Tax Credit and Advance Child Tax Credit Payments Frequently Asked Questions
Here are some quick updates on the upcoming Advance Child Tax Credit Payments that will begin on July 15th.
The child tax credit limit was raised for 2021. If you qualify for these payments, you have TWO options:
1. You can receive advanced payments of these credits from July to December instead of waiting for your 2021 tax return.
Non-Filers: Click HERE to Submit Your Information to the IRS
2. You can choose to opt-out of advanced payments. The deadline to opt-out of July's payment has already passed, but we'll provide the link to opt-out of future payments as well as the deadlines below.
Click HERE to Unenroll From Advance Payments
Why might you want to opt-out? (via The Ascent)
You know you're likely to have a large tax bill due for 2021 and would prefer to leave the Child Tax Credit "on account" to help cover the expected tax bill. For example, if you're self-employed and concerned that you're not keeping enough out to cover taxes, the Child Tax Credit could help.
Your child is moving into adulthood, and you would like to hand the funds to them in one lump sum at tax time.
You have a considerable expense coming up next year and would like to "save" the Child Tax Credit to pay for it.
You're adding a new child to your family between now and the end of the year and don't want to go through the hassle of updating your number of children with the IRS.
Here are a few general examples provided by our tax software service provider. We want our clients to know that these advanced payments may impact the return you're used to seeing so that you can make an informed decision about how you proceed.
1. Taxpayer is married with 2 kids, 10 and 14 years old. The taxpayer’s taxable income is $35,000, the taxpayer typically receives a refund of $2,000 to $3,000 due to the Child Tax Credit and the Earned Income Credit.
If the taxpayer does not Unenroll from Advance Payments, the potential Child Tax Credit of $3,000 (for two children) will be spread out over the rest of this year. The taxpayer will receive Advance Payments of $500 a month until December.
When the taxpayer’s 2021 return is filed the refund will be reduced by the total amount of Advance Child Tax Credit Payments received and they might only receive a $1,000 refund or less.
2. Taxpayer is Head of Household with 3 kids, 15, 11, and 8 years old. The taxpayer’s taxable income is $100,000. The taxpayer typically receives a refund of $200 because the taxpayer minimizes the amount of tax withheld from their paycheck to cover the tax owed.
If the taxpayer does not Unenroll from Advance Payments, the potential Advanced Payments will be $750 a month through December. The advanced payment will be $4,500.
When the taxpayer’s 2021 return is filed the refund will be reduced by the total amount of Advance Child Tax Credit Payments received and they will likely owe the IRS $1,500.
So you can see that receiving the Advance Child Tax Credit Payments may or may not be the best option for you depending on your tax situation.
Opt-Out Deadlines & Payment Dates for Monthly Child Tax Credit Payments (via Kiplinger)
Payment Date: July 15, 2021
Opt-Out Deadline: June 28th, 2021
Payment Date: August 13, 2021
Opt-Out Deadline: August 2, 2021
Payment Date: September 15, 2021
Opt-Out Deadline: August 30, 2021
Payment Date: October 15, 2021
Opt-Out Deadline: October 4th, 2021
Payment Date: November 15, 2021
Opt-Out Deadline: November 1, 2021
Payment Date: December 15, 2021
Opt-Out Deadline: November 29, 2021
We hope this helps! The IRS is the best resource for the most current and accurate information.
2021 Child Tax Credit and Advance Child Tax Credit Payments Frequently Asked Questions
7 Funding Sources for Small Businesses & Start-Ups
7 Funding Sources for Small Businesses & Start-Ups
Once a small business has established a solid business credit profile and consistent, substantial revenue, then accessing business capital becomes much easier. Many lenders want to see that a small business has the following:
Been in business for six months to a year,
Generated upwards of $50K in revenue,
Has at least five positive payment experiences and multiple tradelines on their business credit report,
Pays credit accounts early or on-time at minimum and,
Has a Paydex score of 80 or higher.
Our clients have found that there are fewer quickly accessible resources available for start-ups when they have not yet built that solid foundation that meets lender expectations.
Here are some of the roadblocks that start-ups and small businesses typically face when seeking capital:
The business owner has not fully separated their business and personal income and expenses.
Financial records are non-existent or disorganized and the business is otherwise unable to produce requested documentation.
The business owner has poor personal credit and cannot act as a guarantor for their business when necessary.
No business or financial plan and unable to communicate their vision in writing to potential lenders.
Business owners do not have skin in the game. Lenders like to see a deposit or down payment when you’re seeking capital and many government-backed programs require that the business matches funding.
Has a D-U-N-S number, but never took the steps to establish a solid Paydex Score.
Has established business credit, but their business has no revenue.
A first step in seeking funding is to set realistic expectations.
Can you pay back the loans you’re seeking with business revenue?
Is your financial plan aligned with industry standards?
Can you show the lender exactly how you’ll use the funds to grow your business?
Are you applying with lenders that can serve your current needs and timeline?
You will find plenty of sources encouraging you to apply for grants for your business, but they don’t tell you that grant application is a lengthy and competitive process.
If your goal is to become operational or to expand your business in the shorter-term, then grant funding is probably not the best route. Don't get us wrong; you should continuously seek and apply for grant opportunities, but in some cases getting a loan to become operational makes more sense. Remember that grants secured can potentially be applied to the principle of any loans.
Seven loan & funding types for start-ups to consider:
Seven loan & funding types for start-ups to consider:
Equipment Loans
An equipment loan is used to purchase equipment like a vehicle or tractor. The business will immediately get to use the equipment but won’t have to pay the full cost upfront. The lender charges interest to the borrower and may require a lean against the property to secure the loan.
Best for…
Purchasing equipment
Logistics companies
Start-ups and poor credit borrowers
Popular Lender
Invoice Factoring
Borrowers can sell their unpaid invoices (accounts receivable) or use them as collateral in exchange for cash up-front.
Best for…
Businesses that have cash flow problems due to unpaid invoices
Startups and poor-credit borrowers
Popular Lender
Merchant Cash Advance
With a merchant cash advance, a lender advances a company money in return for a percentage of future credit card sales. Square, Stripe, and PayPal all offer variations of merchant cash advance and typically don’t require additional documentation outside of the sales processed through their platform. This is why it’s a good idea to use one of these platforms from Day 1.
Best for…
Emergency financing needs
Poor-credit borrowers
Businesses with strong daily revenue
Popular Lender
4. Personal Loan for Business Purposes
A personal loan for business is an option for businesses and entrepreneurs that do not have the credit score or business documentation required to qualify for a business loan.
Best for…
Best for…
Business owners with strong personal credit
Entrepreneurs, startups, and new businesses
Popular Lender
Varies greatly depending on qualifying factors. Our company has access to a lender database of more than 50 lenders through which we can match you based on your current financial situation.
Book a strategy call HERE to get started.
5. Microloan
A microloan is typically defined as a loan of $50,000 or less.
Because these are smaller loans, they are best for smaller businesses, sole proprietors, and startups that have lower capital requirements.
Best For…
Best For…
Startups and new businesses
Businesses that only need a small amount of money
Poor-credit borrowers
Popular Lenders
Your local Small Business Association or state business development programs. Search for something like “Chamber of Commerce + Your State” to locate these lenders.
6. Crowdfunding
With crowdfunding, a small business or startup uses an online platform to raise money from a group of investors or their community (friends and family).
Best For…
Product-based businesses
Entrepreneurs with a strong, marketable business plan
Businesses who need to raise small amounts of money for a down-payment or basic start-up costs
Popular Platforms
GoFundMe, Kickstarter (product-based only), or Patreon (ideal for service-based businesses).
7. Business Lines of Credit and Credit Cards
A business credit card is a revolving line of credit. Business cards are generally used to finance everyday expenses.
Best For…
Best For…
Financing everyday expenses
Small materials and supplies
Popular Lender
Shell Small Business Card, Quill, and Amazon Business Line of Credit
There you have it! If you’re not sure where to start, please visit our previous blog, “5 Things Your Small Business Needs to Get Funded.”
As a reminder, our company provides capital consulting, business credit building services, and has access to a lender database of more than 50 lenders through which we can match you based on your current financial situation.
Book a strategy call HERE to speak with a member of our team.
5 Things Your Small Business Needs to Get Funded
5 Things Your Small Business Needs to Get Funded
If you're are a small business owner looking to build business credit and acquire capital, then you can start with these five steps. Having access to capital helps prepare your business for emergencies and for growth and expansion.
Get an Official Business Address - Not a P.O. Box or UPS Address
Lenders like to see that your business has an official, physical address that is separate from your home address. This adds a layer of privacy and security to you as the owner because business addresses are public information once you have incorporated.
If your business is not financially ready for a brick and mortar or doesn’t require one, then you can search for Virtual Office or Co-Working Spaces in your area. A virtual office location costs $50 -$100 per month on average. You’ll want to do this before you move on to the next steps so that you can use your business address on all business paperwork going forward.
Most simply put, lenders take your business seriously when you do! Your odds of approval increase when you establish the following things for your company:
Entity Formation - You need to have formed an LLC, S-Corporation, C-Corporation, or a Non Profit.
Forming a legal business limits personal liability so that your business debts are no longer your debts. There are additional tax and legal benefits that may apply depending on your business structure and financial situation.
We recommend using IncFile to form your business. With their silver package you pay only your state’s filing fees and Inc File assists you with Preparing & Filing the Articles of Organization, Unlimited Name Searches, and FREE Registered Agent Service for a year, but you will need to apply for your EIN with the IRS for free.
Branded Business Website & Email
You should have a basic professional website with a branded domain name and associated email. For example, if your website is mysmallbiz.com then your email address should be something like info@mysmallbiz.com.
You can purchase a website domain for as little as $12 per year and get a custom business email for as little as $6 per month with Google Workspace.
Apply for a D-U-N-S Number
Once you have completed the previous steps of getting a virtual address, forming your business, and setting up your professional website and email, then you’re ready to apply for a D-U-N-S number. A D-U-N-S number is like a social security number for your business. Not only is it useful for establishing your business credit profile, but it is also an integral part of SBA and other government processes. The application is FREE.
Establish a Paydex Score of 80 - 100
After your D-U-N-S number is approved, then you need to get to work on building your business credit score and profile. This process typically takes between 3 - 6 months depending on how quickly you establish payment experiences and tradelines on your credit report.
You can start building your business credit immediately by getting a Nav.com monthly Business Boost or Business Loan Builder membership ranging from$39.99 - $49.99 per month. Nav account payments are reported as a new tradeline to Dun & Bradstreet, Experian, and Equifax every month.
Businesses typically apply for Vendor Credit or NET 30 accounts with companies like Quill or Grainger first. Then move on to gas credit cards and retail accounts such as Walmart or Amazon. You must pay your balances early or on time at a minimum.
These are the first steps in the ongoing process of showing lenders that your company is creditworthy. While many of the application processes mentioned here are free to submit, they can be difficult or confusing to complete. You can absolutely move through this process on your own, but if you decide that you need help, our team is here to assist you with our Business Credit & Capital Consulting Services.
Schedule a call HERE to see if our program is a good fit for your business needs.
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