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The side gig economy is growing in leaps and bounds.
From ridesharing to online platforms that match freelancers with projects, to handmade goods on Etsy, the number of Americans working a side gig continues to expand. Some estimates put the gig economy at 34% of the workforce, with projections for that to increase to 43% by 2020.
To understand how Americans approach their side gigs and small businesses CompareCards.com by LendingTree conducted a national survey of 1,000 American adults who report having a side gig or small business. The survey was conducted September 18-23, 2017.
Many in the side gig economy are relative newcomers. Over 50% of people with side gigs have had one for less than 2 years, the survey found.
Many people want to ditch their 9-5 job. Most survey respondents (58%) with side gigs want to turn them into a full-time career, the survey found.
- Millennials (62%) hope to make it a full-time job more than Baby Boomers at 44%.
- 71% of people with an arts and crafts side gig, like Etsy, hope to make it full-time.
The survey focused on how people handle business expenses, from gasoline to internet to office supplies.
- 75% of people with a side gig or small business charged business expenses like internet, gasoline, car maintenance, or shipments to a personal credit card in the last year.
- Out of people who have a side gig, those who do ride sharing jobs like Uber/Lyft are most likely to have a business credit card at 45%.
- Only 27% of gig economy workers have a business credit card, but 32% said they were considering getting one.
Mixing business and personal finances
Most people with a side-gig or small business mix personal and business finances, the survey found. That could be a mistake, especially when it comes to reconciling with Uncle Sam. Using a business credit card to pay for business expenses can be invaluable once tax time rolls around.
“My advice to these business owners is that you need to treat your business like a business. A business credit card is a great way to keep those expenses separate. It will protect you from liability, and it will help your end-of-year accounting process go a lot smoother,” says Jeff White, staff writer at Fit Small Business.
Ridesharing drivers take a business-like approach
Drivers for Uber and Lyft are ahead of the game, compared to other gig economy workers, when it comes to managing their side gig finances, the survey found. Out of people with a side gig, those who do ride sharing jobs like Uber/Lyft are most likely to have a business credit card at 45%.
When rideshare drivers choose to run their business as independent contractors, using a business card adds legitimacy to their operation, says Harry Campbell, founder of TheRideshareGuy.com.
“While it can seem like a hassle to set up and manage expenses with a business credit card, it's important to have because it shows the IRS drivers are serious businesspeople. It can also come into play if the IRS determines drivers' businesses are hobbies and decide to eliminate some of their deductions. Having that business card can definitely add a legitimate element in that case,” Campbell says.
Rideshare drivers and taxes
Rideshare drivers may be able to deduct expenses like gas, car maintenance and business card annual fees at tax time. There are two tax methods rideshare drivers can consider: the standard rate mileage or the actual expense method, says Michael Slack, lead tax research analyst at The Tax Institute at H&R Block. Slack outlines the differences below:
- Business standard mileage rate: This means items including depreciation, maintenance, repairs, tires, fuel, oil, insurance, and registration fees are included in the mileage rate. However, a driver using the standard mileage method generally can still separately deduct: tolls and parking fees, auto loan interest, and personal property taxes, Slack says.
- Actual expense method: If the driver does not use the standard mileage rate, he/she can deduct the actual expenses of operating the car. These expenses include: depreciation, lease payments, registration fees and licenses, insurance, gas, oil and repairs, garage rent, tires, and tolls and parking fees, Slack says.
- Business credit card expenses: Annual fee expenses on a card used for business purposes are generally deductible, regardless of how the driver chooses to report their vehicle-related expenses, Slack notes.
Rideshare drivers can benefit from a business card in many ways, including simplification of their lives, preventing headaches at tax time, and getting rewards [like cash-back on gas] for using a business card, Campbell says.
Many entrepreneurs face challenges accessing start-up capital. Some entrepreneurs turn to business credit cards to fill that gap. There are business credit cards that offer long 0% introductory interest periods of 12 or even 15 months. That means entrepreneurs can take a year or more to carry a balance without interest charges piling up.
Bryan Clayton, CEO of GreenPal, a self-described “Uber for lawn care” company relied on a business credit card for his start-up costs. “When we launched our business two years ago we had no money and no outside capital to get started,” Clayton says.
Like most tech start-ups, they went on the fundraising circuit talking to angel investors and venture capitalists begging for money, Clayton says. They were told no over 40 times.
“I was fortunate enough to get a business credit card and this enabled my team to tap an unsecured line of credit for $85,000 to get our business started. We went this route versus a personal credit card because we could only secure $25,000 on a personal card and we needed $80-$90,000 to fund our first six months and get our beta version of our app built,” Clayton says.
GreenPal paid off the business credit card debt in the first year. This year the firm is projected to surpass $3 million in annual revenue, Clayton says.
Looking back, he’s glad the investors said no. “With their capital, they would have owned and controlled 30% of our business. Because we are self-funded, my co-founders and I own it all,” Clayton says.
Preserve your personal credit score
Using a business credit card for a side gig could also help protect one’s personal credit score. Credit utilization, or the amount charged relative to the credit limit, is one factor that determines a credit score. Using a business credit card for business expenses may not impact one’s personal credit utilization ratio.
“If drivers have a business credit card and a personal one and keep their debt on those cards low, having that extra business card could improve their credit score,” Campbell says.
Business card keeps expenses separate
A key advantage of using a separate credit card for business expenses prevents the comingling of personal and business expenses, says H&R Block’s Slack. “Though use of a separate account for business purposes is not required, one question the IRS often asks when examining small businesses is if separate accounts were utilized for business and personal expenses. Using one account for both only leads to the potential for more scrutiny on the items claimed as deductions,” Slack says.
Maddy Osman decided to get a business credit card after separating her business finances from personal for her small business. “This is an essential step for anyone who works for themselves, as it helps you to better understand what money is ‘yours’ for spending and expenses, and what is ‘the businesses’,” Osman says.
Entrepreneurs miss out
Lastly, there is a knowledge gap about the tax deductions and benefits surrounding business credit cards, the CompareCards survey found.
- 55% of gig economy workers don’t know that tax deductions are available for business credit card fees (e.g., annual fee, late fee, etc.)
- 44% of small business owners didn’t know that “that fees business' pay to accept payment from a customer’s credit card are tax deductible.”
Business credit cards can have tons of perks or lucrative sign up bonuses, Campbell says. “These perks can include points to stay at hotels or cash back, all things that can make it easier for small business owners to travel for work or put money back into their businesses. It may take a few hours to get set up, but once you have it, it's well worth the time investment because of all the benefits and protections a business credit card offers,” Campbell says.