Five tax tips for working in the sharing economy
The sharing economy provides income for hundreds of thousands with total revenues surpassing $15 billion, according to some estimates. With more Americans turning to sharing or gigging to earn a living or to augment their income, they face more complicated tax requirements. For those who provide occasional or supplemental services, this tax complication could be unexpected.
However big or small a taxpayer is going to scale their business in the sharing economy, here are five tax tips they should keep in mind when it comes to taxes:
1. Sharers become small business owners while hosts become landlords
The sharing economy encompasses many different types of work: driving, running errands, renting out space. But the tax law and IRS don’t see all sharers the same. Taxpayers who rent out their home, or just a room in their home, are rental property owners – not small business owners. Just because it’s a series of short-term rentals obtained through a “sharing” platform does not mean it is treated much differently from other more traditional rental properties. For more information, taxpayers who host should check out the Airbnb Host Reporting Guide from The Tax Institute.
Others, like drivers and taskers, are usually self-employed or small business owners when it comes to their taxes. Their profits likely will be subject to self-employment tax of 15.3 percent. This tax covers their required contributions to Social Security and Medicare.
2. Tax time comes four times a year now
Sharers may be surprised to learn that, unlike income received from an employer, no taxes are withheld from the income earned from their sharing business. In addition to owing self-employment tax, the small business owner also must pay federal income tax on their earnings. That means, depending on their tax situation, they’ll be taxed at a rate of 10 percent to 39.6 percent of their net profits.
However, if taxpayers wait until April to pay their tax bill, they could end up incurring an estimated tax penalty. To avoid this penalty, they must pay 90 percent of the tax they owe for the current year or 100 percent of the tax owed for the previous tax year.
They can pay what they owe by making estimated tax payments four times a year: in April, June, September and January. If they have a traditional job as well, they could instead adjust their withholding with their regular employer to cover the taxes they will owe from their sharing job.
3. Tax deductions for the self-employed
The flip side of being self-employed and paying self-employment tax is that certain expenses are deductible against income. Sharers can claim their expenses for running their business (on things like advertising, vehicle licenses and car expenses such as gas and repairs) as deductions on their tax return. It’s important to keep receipts for all the items purchased to run their business. And whether they use IRS’ standard mileage rate or actual costs to calculate their deductible vehicle expenses, it’s essential that they keep a log of miles that they traveled for business.
4. The tax return is about to get a bit more complicated
By the end of January each year, taxpayers should receive a Form 1099-MISC with income reported in box 7, reflecting the income earned working as an independent contractor. They’ll need to report all this income on Schedule C of their federal income tax return. The IRS also receives a copy of any Forms 1099 taxpayers receive and will match that information against the tax return to make sure the taxpayer reports all their income.
It’s a common misconception that if a taxpayer does not receive a Form 1099, or if the income from the side job is less than $600, that income isn’t taxable. This isn’t true. All income earned through a business, as an independent contractor or from informal side jobs, is self-employment income, which is fully taxable and must be reported on Form 1040, Schedule C. If net profit exceeds $400 for the year, they’ll also need to prepare Form 1040, Schedule SE, for self-employment taxes.
5. Getting professional tax help can save money
Sharing jobs can lead to more complex tax situations. Not only can a qualified tax professional who specializes in small business or rental income help sharers identify ways to lower their taxable income and claim all the tax benefits they’re eligible for, but the cost of tax preparation may even be a deductible expense. A qualified tax professional should:
- have up-to-date and ongoing training,
- have expertise in small business and self-employed tax requirements and benefits,
- guarantee their work and
- be available year-round.
Sharing is an easy way for taxpayers to start a business – and find themselves in a more complex tax situation than they realized. Seeing the right tax professional will help simplify the tax requirements and help the taxpayer get the most out of their new business.
To lower the chances of an audit and prepare to defend a tax return in the event of an IRS audit, a small business should conduct their own informal audit.