When Side Hustle Meets Schedule C: What Gig Workers Should Know About Taxes

In the movie Everything Everywhere All At Once, an officious IRS agent (Jamie Lee Curtis) meets with Evelyn, a harried launderette owner/multiverse jumper (Michelle Yeoh) she’s auditing. Surrounded by untidy stacks of business receipts and other tax-related documents, the IRS agent explains that Evelyn needs to be able to distinguish between a hobby and a business and that she needs a Schedule C for every single small enterprise.

Multiverse travel might be easier than dealing with multiple fledgling companies on your income tax forms. Besides being able to determine whether your “career” as a musician is a hobby or a business (it’s a business if the income from it usually outpaces the expenses), you have to know whether you can legally deduct a karaoke machine and other purchases.

Figuring out what qualifies as a business expense is one of the biggest conundrums facing millions of social media influencers and other gig workers. But even knowing whether you are a gig worker and can take certain business deductions may be just as tricky. We’re here to help.

Are You a Gig Worker? You Might Not Know for Sure

A recent study by the National Bureau of Economic Research (NBER), summarized at Bloomberg(Opens in a new window), found that 15% of all US workers may be independent contractors, rather than the 7% that the Bureau of Labor Statistics has identified. The reason for the disparity, the study notes, may be due to workers incorrectly labeling themselves, believing they are employees when in reality they are contractors.

There’s also the matter of people who work gigs in addition to having a full-time job. Freelance employer service Upwork ran a survey(Opens in a new window) last year that found 39% of the workforce, or 60 million Americans, did some form of freelance work in 2022. This number is up from 34% in 2014, the year the survey started. At ResumeBuilder.com, chief career advisor Stacie Haller says surveys at her company land on the same general finding: that the number of people taking on gig work in the US has increased.

ResumeBuilder.com surveyed individuals(Opens in a new window) who were self-employed or had a side hustle. Not surprisingly, the most common job category reported was independent contractor (34%), which can mean a lot of things. Running a small retail business and the generic “gig work” tied at 28%. Respondents were allowed to select multiple answers, and many likely did. Coming in behind those top two categories were e-commerce business (24%), social media influencer (22%), blogging or writing (19%), and sex work (15%).

Can You Deduct a Bundt Cake?

Sheletta Brundidge (shown below) is a 26-hour-a-day woman in a 24-hour-day world. Besides facing the challenges and experiencing the joys of raising four young children, three of whom are on the autism spectrum, Brundidge is, above all, an advocate for causes she feels passionate about. She’s a journalist, a radio talk show veteran, and a podcaster with her own production company. She’s also a book author(Opens in a new window), an Emmy Award-winning comedienne (her website is Sheletta Makes Me Laugh(Opens in a new window)), and a social media influencer. A native of Texas, Brundidge lives in Cottage Grove, Minnesota.

With all that she has going on and her many revenue streams and business expenses, Brundidge works with an accountant to get her income taxes prepared and filed. “I don’t have the bandwidth to do my own taxes. To keep this business going, I have to turn that responsibility over to someone else,” she says. “If I had to keep track of my money, I wouldn’t make any.”

Brundidge doesn’t try to determine which business expenses she can deduct. “I report everything [to my accountant],” she says. “As a small business owner, I don’t know what I don’t know.” She keeps every paper receipt in file folders organized by month, which she hands over to her accountant. 

Brundidge has one business debit card and one business checking account, which she had a hard time getting, even though she made $250,000 last year. She doesn’t use financial services like Venmo or PayPal, so it’s easier to track income and expenses than it would be if she were connected to customers and suppliers online.

“If we aren’t doing checks or swiping, it isn’t happening,” she says.

Brundidge has been surprised that some expenses she thought were deductible actually aren’t. For example, when she’s done business with someone—selling them copies of her books or speaking at their event, for example—she sends them flowers or a Bundt cake, which, as her accountant told her, are considered gifts, not advertising expenses. 

But some expenses that you might not expect to be deductible are. In Brundidge’s case, three of her four children are on the autism spectrum, and they produce a podcast that explores how different facilities around the country accommodate children with sensory challenges. So visiting these places is a legitimate expense, as was a visit to an autism-friendly Santa. Brundidge has the podcasts to back up her business deductions. She’s also had to prove to an IRS auditor that she gives 10% of her income to her church.

“If I had to keep track of my money, I wouldn’t make any.”

Conscientious organization and a good accountant are the reasons her audit only took about 45 minutes and that she only owed $1,900 at the end of it.

Watch Out for Uncle Bob and Ghost Preparers

If you’re going to hire professional help as Brundidge did, you should be wary of two things in particular during the tax season: “Uncle Bobs” and ghost preparers, according to Mark Steber (shown below), chief tax information officer at Jackson Hewitt.

We all have a relative who provides tax advice for free! That’s an Uncle Bob. They’re not a reliable source unless Uncle Bob happens to be a professional tax preparer who will sign your tax return.

Ghost preparers are those who offer to prepare your tax return for cheap but won’t sign it, or at least not with their real names. And they certainly won’t see you through an audit. They often put handmade signs out in heavily trafficked areas in the late winter and early spring: “Taxe$ Done for Less!” or “Don’t Pay High Prices! We’ll Do Your Taxes Cheap!” or “Fast, Cheap Income Tax Preparation!”

“That’s not a red flag,” Steber says. “That’s a red tsunami, a big red balloon.”

Jackson Hewitt Has Seen It All

Jackson Hewitt is the second-largest preparer of individual tax returns in the US. Besides offering DIY online tax preparation, the company has roughly 6,000 locations (3,000 of them in Walmart stores) where you can work directly with a professional preparer. These individuals go through a comprehensive education that includes specialized training in Schedule C and self-employment issues. 

If a professional is unsure whether a specific business expense is deductible, for example, he or she can escalate the situation to the company’s answer system, a massive compendium of tax knowledge gleaned from decades of experience. So preparers are never really alone with a tax return but can consult with “the old sage in the back who’s been there 30 years,” as Steber puts it, through Jackson Hewitt’s call center.

They’ve seen it all, from the self-employed individual who comes in with pictures of all of her receipts neatly organized to the guy who has to have every possible deductible expense dragged out of him (“Did you do any advertising?”). They can work with those scenarios and any in between.

Use Tech, Learn the Rules, Stay Engaged

Whether or not you’re getting professional help, the tax equation is simple, according to Steber. First, you need technology. You can’t just sit at a table surrounded by mounds of paper and hope for enlightenment. Second, you have to put in the time so you understand the rules. Third, you have to be engaged with your taxes, which means keeping good records and taking the deductions you deserve, not just obsessing over whether you’ll get audited if you claim a printer cartridge or a trip to pick up supplies. 

The cost of working with a tax pro may be much less than you anticipate and will likely save you money in the long run

Self-employed people are predisposed to having more problems than larger companies, Steber says. They don’t have staff. They have many distractions. They don’t have a surplus of time. And they’re already operating on a thin margin, all of which makes conscientious recordkeeping critical, Steber says. 

For some businesses, Steber says, “your tax return is your single largest financial transaction,” so treat it with the care it deserves.

What Kind of Technology Helps Gig Workers Do Their Taxes?

No matter your business size, there are many potential deductions to reduce your taxable income, including business and home office expenses, according to Laura Adams, MBA, a personal finance expert with Finder, a global financial comparison platform. “The best way to maximize them is by using a bookkeeping program that tags or allocates transactions for reporting purposes,” she says. 

Adams uses QuickBooks, which, as she says, automatically aggregates financial activity into a dashboard where she can identify transactions as personal or business and easily create reports at tax time. QuickBooks allows you to categorize transactions so you can better see which ones might be deductible, such as office expenses, contract labor, and business insurance.  

Small businesses should separate their personal and business expenses by having a separate business bank account and ideally using an accounting program, such as QuickBooks, FreshBooks, or Wave. “That’s an excellent way to simplify record keeping and ensure you take advantage of legitimate deductions, whether you or a pro completes your return,” she says.

But Adams also takes the next step: She works with a CPA. “Their advice improves my tax strategy and allows me to pay as little tax as legally possible,” she says. “If I’m unsure whether a particular expense is deductible, I tag it and discuss it with them at tax time.”

The Belt-and-Suspenders Approach to Taxes

Adams says that it’s always wise for small businesses to get help from a tax professional. They can update you on tax law changes, help maintain your records, and minimize tax liability. “The cost of working with a tax pro may be much less than you anticipate and will likely save you money in the long run,” she says. 

Adams’ approach—using technology to track income and expenses and consulting with a pro—is a philosophy shared by many. The more you can do on your own in terms of organizing receipts and records, the lower your preparation fees may be.

Use Accounting Technology to Organize Tax Records

To that end, Miguel Otchere-Marshall, owner of Nelopy Accounting in Atlanta, recommends Xero to his clients for accounting tasks. Nelopy is a six-year-old financial services provider and a Xero partner, which means it receives support from the company to work better with small businesses that use the accounting tool. (The firm supports other industry-leading applications like Bill, Gusto, and Expensify, too.) Otchere-Marshall says his clients like the ability to look up financial information on their phones using Xero and equates accounting tools as being “like the foundation when you’re building a house.”

Small business accounting applications, including Xero, help you track your business income and expenses in a number of ways so you can determine what is tax-deductible. You can import transactions from your bank accounts, categorize those transitions, and do other bookkeeping chores throughout the year that better prepare you for completing your annual tax returns.

Nelopy Accounting provides services for a variety of gig workers, like photographers, disc jockeys, and graphic designers. Otchere-Marshall recalls working with a photographer who hadn’t kept financial records for two years. “Sometimes, you have to do a lot of handholding,” he says. He’s had to start at the beginning with such clients, helping them choose a business structure (like sole proprietor or LLC) and learn about mileage tracking, for example.

Expenses Must Be Ordinary and Necessary

Marc Duperval, head of tax at Nelopy Accounting, uses Intuit ProSeries software when he’s doing tax preparation for clients. He explains that Schedule C includes a list of categories for expenses that might be tax-deductible. 

“The IRS says that expenses have to be ordinary and necessary,” he says, “and not over the top.” 

That may sound vague, but those are the words the IRS uses. An ordinary expense, the agency says, is, “…one that is common and accepted in your industry.” A necessary expense is one that is, “…helpful and appropriate for your trade or business.” (An expense does not have to be indispensable to be considered necessary.)

There’s no master list anywhere of what deductions the IRS deems acceptable, though tax websites like TurboTax are good at providing examples. There’s really no way to know for sure whether the IRS will accept a given deduction unless you’re audited. But common sense can go a long way toward making these decisions. 

The IRS does look especially carefully at some categories, Duperval says, like the home office deduction and expenses for travel and meals and entertainment. If you fly to Las Vegas for CES because you have created a product and secured a small space in a booth to showcase it, and you have kept all of your related receipts, the IRS is likely to accept those expenses. 

If you fly to Las Vegas because you want to see all the cool stuff at the show and you’re considering inventing something you could exhibit there someday, it doesn’t matter how carefully you’ve documented your trip. An IRS auditor isn’t likely to look kindly on those deductions.

Income Is Easier to Document

It’s much easier to document your gig or self-employed income than your expenses, says Duperval. Most workers receive a 1099-NEC or 1099-K or 1099-MISC, or a statement from a financial services company. Since the IRS receives copies of those forms, there’s no gray area. Your documented income is your documented income. If your company’s products or services aren’t reported on an official form—say, for example, you sell unique mineral specimens to collectors—you need to keep your very own precise written records.

The same goes for your expenses, even though you may not be able to claim them all. But that doesn’t mean you shouldn’t try to claim as much as you’re legally allowed.

Pay Attention to Your Taxes All Year

Use technology if you can, including personal finance software and accounting software, to track and categorize your business expenses and do year-round tax planning. Check out tax software when it’s time to prepare and file. Consider enlisting the help of a tax professional if you don’t want to go it alone. 

The IRS is awash in Schedule C forms as more taxpayers take on side gigs or strike out on their own with an idea for a new business. Use common sense and consult tax resources, and your 1040 may just sail through the IRS without any red flags.