By now, most consumers are familiar with the gig economy. You’ve almost assuredly used services such as Uber, Lyft or DoorDash, perhaps even very recently. But while the gig economy is convenient and can be lucrative, it can create some complex financial scenarios.
For instance, participants in the gig—or service, or sharing—economy often fail to understand the tax and accounting implications of their activities. The same goes for online sellers who make money through e-commerce. Accounting firms need to make sure they’re prepared to deal with the tax complexities of an ever-growing number of gig economy and e-commerce participants.
Unexpected complexities of the gig economy
The gig economy continues to boom. Forecasts show that by 2027, gig workers will account for more than half of the US workforce. Of course, many of those people will also have full-time jobs, but that’s part of the appeal of gig work: earning a little extra money with a side hustle. Consumers remain enthusiastic purchasers of gig services as well. A feared post-pandemic dip in spending on online services never materialized as Americans continue to enjoy services such as ride shares and food delivery offered by freelancers.
However, individuals in the gig economy often dive into the work without realizing the tax and legal implications of what they’re doing.
“Most people get into driving, or get into the shared economy looking to make some extra money,” says Harry Campbell, founder of the popular website The Rideshare Guy.
Campbell left his job as an aerospace engineer a decade ago to drive for Uber and Lyft. “They don’t realize that they’re actually running a business. From day one, you’re making revenue. That’s a business.”
Service work and e-commerce raise questions
Gig work brings up a lot of questions for those who do it:
- How do I track my expenses?
- If I use my car for business, do I attempt to deduct standard mileage or my actual vehicle expenses?
- How do I get the proper insurance for my business model?
E-commerce sellers can run into even more uncertainty and complexity:
- How do I handle and report on inventory?
- When accounting for sales, returns and vendor payments, how do I form a supportive cash flow?
And that’s just a small sample.
Those types of questions used to be for business owners to ponder. Now, individuals who were just looking to run a few errands and collect some extra cash are faced with these same questions. It’s not quite as easy as just firing up your smartphone and making some quick sales.
Tax challenges of the gig economy
If there’s a component of e-commerce that’s likely to cause consternation for an accounting firm, it’s taxes. Take e-commerce, for instance. Many online sellers believe that, since they’re selling online, they only need to collect sales tax in the state where they’re based. In the United States, all merchants—physical or online—are required to collect sales tax from buyers in states where the seller has nexus.
Businesses reach nexus when they meet certain thresholds in a state. Those thresholds can differ significantly by state. And that’s only where the confusion starts. Sales tax laws are extremely varied. If e-commerce sellers even collect sales tax (some don’t), the process of registering and filing for sales tax payments, not to mention the tax rates, is also different from state to state.
Even the timelines for tax payments are wildly different from one state to the next, and they can change. Sellers that do thousands of sales a month through multiple channels and with inventory stored throughout the country can quickly find their tax situation complex. They could face penalties if they don’t make the proper payments at the right time.
6 steps firms can take to manage clients in the gig economy
Just as individuals are faced with new opportunities, accounting firms and professionals can capitalize on the gig economy and e-commerce with some adaptions to the status quo. An individual operating in the service economy or selling online has a host of tax and finance concerns to go along with all that new opportunity.
Scott Scharf should know. He built a business around helping e-commerce sellers navigate the complexities of accounting for online selling. Scharf co-founded Catching Clouds with Patti Scharf, which later merged with Acuity. Scharf’s mission is to help online providers of goods and services solve their business and accounting technology problems.
Scharf recommends a multi-pronged approach to the gig economy for accounting professionals:
1. Know the field
While accountants don’t necessarily need to start driving for Uber on the weekends, it’s important to know which service platforms exist in a given market. You can’t anticipate what kinds of accounting and tax concerns a participant might have if you’ve never even heard of the third-party platform that they’re using.
2. Study tax policies for ride-sharing
How would you advise someone who has been driving for Uber but hasn’t tracked mileage for the entire year? How should a driver even track mileage? Can “gray area” products like trunk organizers and car washes be expensed? These are just some of the questions you’ll encounter when dealing with gig economy workers.
3. Review state tax laws for e-commerce
If you have a client that sells online and ships out of warehouses in other states, you’ll need to determine the tax implications and payment procedures. There are a host of resources available for this, including paid courses. Specialized companies like TaxJar and Avalara also post educational information regularly on their websites.
4. Know the technology
For many gig workers and e-commerce sellers, being immersed in several selling and shared economy platforms means that income statements and source data is spread out among different apps and systems. Accounting professionals should be increasingly comfortable in navigating these apps in order to pull together the appropriate income and expense reports.
When faced with an e-commerce seller that is operating several storefronts, sales data can reside in dozens of different places. Running applications and storing data with a cloud partner is the most effective and cost-efficient way to bring all the data you need into one place.
5. Attend conferences
Technology issues like dealing with the shared economy or e-commerce are still common topics at many conferences and industry events. Browse the attendees and sessions beforehand to target events where these topics are discussed.
6. Visit the IRS’s website
The Internal Revenue Service also has resources available to help deal with some of the issues around gig work and e-commerce.
The gig economy and e-commerce are major forces for the economy and only getting bigger. With a few best practices, your firm can capitalize on the opportunity to help clients doing service work and selling online.