How multiple incomes benefit you at tax time

[The following is a guest post by Derek Davis, founder of Shared Economy CPA, which provides tax preparation and consulting services to on-demand economy and 1099 workers.]

Successful people often diversify their earnings by finding ways to produce more income, and many on-demand contractors have several gigs. According to a study done by Uber, only 38% of Uber drivers work that as their only job. Another 31% said they worked a full-time job and drove for Uber in their spare time, while 30% said they held another part-time job. In addition, 70% of Etsy Sellers work other jobs besides their creative business. AND a survey by Freelancers Union found that 87% of freelancers have more than one gig a month, and 35% have more than four gigs.

These additional work opportunities come with the complication of figuring how to report your income when it's tax time. Here are some tips to retain as much of your earnings as possible, if you have multiple income streams.

1. Reporting Multiple Incomes - same or different schedule C?

If you have multiple self-employment incomes that you need to report on your Schedule C, you are permitted to report these items on the same Schedule C if the work is closely related. However, if the work that you have done is not closely related, then you need to complete a separate Schedule C for each activity. For example, if you drove for Uber and Lyft, you could report your income from each company on the same Schedule C.

2. Tax Benefits of Multiple Gigs

With multiple income sources, there is the potential to deduct more expenses since “work” is a more diverse term for you. For example, if you drive for Uber and run an Etsy shop, you can take the home office deduction for your Etsy business AND you can deduct vehicle expenses from your Uber income.

If both of your businesses aren’t profitable, you can deduct the losses from your unprofitable business, possibly dropping you into a lower tax bracket and reducing your tax liability.

3. Start Your Side Business During Good Years

It’s a smart move to start a new business when you’re already doing well with an established business, since the IRS allows you to write off the losses from a business on your personal tax return.

For example, if you have an established and steadily profitable driving business with Uber, and you’re thinking about starting an Etsy shop, it could be good timing. The IRS knows that there are significant costs involved in starting a business and that the business might take a few years in order to become profitable.

However, in order to ensure that your business doesn't end up being considered as a hobby – which disallows claiming business deductions – make sure you have a plan for profitability. The IRS presumes that an activity is profitable if it generates a profit during at least three of the last five tax years (including the current year). If your business does not meet these qualifications, it will be considered a hobby by the IRS.

4. “But I won’t get audited, right?”

Be careful. Don’t make the mistake of believing that your tax return is too small for an audit. While people who gross more than $100,000 per year are more closely scrutinized by the IRS, you could be at risk by being self-employed.

If your income varies greatly from year-to-year, and you use contractors to help with your business, you may have higher chance of an audit. To avoid tax problems – especially with multiple incomes and complex deductions – make sure you only deduct the expenses you’re entitled to, such as vehicle expenses, legal and accounting services, home office expenses, and depreciation. Hopefully, your multiple gigs have helped you earn more this year and claim some new deductions, keeping you and Uncle Sam happy.

[The information above is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.]