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A side gig is a great way to earn some extra cash, but it also means you’re responsible for handling your own taxes.
Tax deductions can help reduce the amount you owe Uncle Sam; However, they are easy to abuse. “You can only write off business expenses that are directly related to your business,” says Jay Zygmont, Ph.D., MBA, CFP, founder and CEO of Childfree TrustWrote in an email.
These are the three most abused gig tax deductions according to experts.
Also see four tax deduction sides gig workers can’t miss.
home office deduction
Claimed, “The home office deduction is probably one of the most abused deductions.” Misha RoseEntrepreneur and financial teacher. “People often attempt to claim this deduction when they do not meet very strict requirements, namely, using a specific area in their home only for regular business activities.”
according to irYou must use your home for your business on a regular basis. This could be your home, apartment, condo, mobile home, boat or similar structure.
This means that you will not qualify if your work area doubles as a personal area. For example, answering emails from your couch or using your dining table for both meals and work does not meet the IRS’s “exclusive use” requirement.
vehicle expenses
According to Rose, overstating vehicle expenses is another common mistake. “This could result in an audit finding that you reported false expenses and possible penalties,” he said.
To make sure you don’t overstate your expenses, you’ll need to keep detailed records.
“If you’re trying to write off your vehicle for business, you have to account for both business and personal use. Being a business owner doesn’t mean your vehicle is 100% written off for business,” Zygmont explained.
He recommended keeping a journal of miles driven and setting a percentage for each business and personal use.
personal expenses
There is also abuse of reporting personal expenses as business expenses. “Such expenses may include meals, travel, memberships, etc., that are not related to generating income,” Rose explained.
If done intentionally, it is tax fraud. Even if it’s a mistake, it could result in taxes, penalties, interest, and a possible audit.
Zygmont said, “I’ve noticed people try to forgo dinners and visits when they have nothing to do with their business.” “To write off meals for your business, you must be conducting business over the meals, such as working on a deal with a customer.”