The Sharing Economy and Your Tax BillSubmitted by Durbin Bennett on June 13th, 2016
Growing numbers of Americans are providing or using services through the so-called "sharing economy," or online marketplaces that bring customers together with "micro-entrepreneurs" who offer services such as car rides or a room for the night. But many of the users and providers of these services may not be keeping track of the taxes they owe or the deductions they are entitled to claim. If you are participating in the sharing economy, you should consider the tax implications not just during the tax filing season, but throughout the year.
As a customer of sharing economy businesses, you may be entitled to deduct a portion of the amount you spend as business expenses. If, for example, you rent a room from an Airbnb host while on a business trip, you can claim the cost as a business expense on your tax return as you would a hotel room. In some cases, you may even find that using online marketplaces makes keeping track of your tax receipts easier than using traditional services. For example, because car-sharing services like Zipcar generally cover the costs of insurance, gas, and maintenance, if you use these services for business purposes you may find itemizing your deductions easier than if you had rented a car or used your own vehicle. Many car- and ridesharing services not only provide users with a receipt after each trip or rental period, but also the ability to view and track all charges online.
But if you provide services through a sharing economy company, filing your taxes may become more complicated. Even if the money you earn through renting out a room or taking the occasional job is just supplemental income, Federal and state taxes, as well as local taxes and licensing laws, will apply if you earn more than $600 a year before expenses (or $400 after expenses).
As a service provider, you are responsible for reporting all of your Form 1099 income, as well as any other business income you earn, on your Federal tax return. Online marketplaces like Lyft and Airbnb classify their providers as independent contractors. Their U.S.-based providers are generally required to fill out Form W-9 before offering their services on the marketplace, and the companies then send their providers the Forms 1099 in January that reflect the amounts each provider has earned throughout the previous year. Generally, this income is reported on Schedule C, and is attached to Form 1040.
As an independent contractor, you will be responsible for paying the projected income and self-employment taxes (Social Security and Medicare taxes) owed on the earnings from your business on a quarterly basis. With the help of a tax software program or a tax professional, you can generate an estimate of the amount you will owe each quarter based on your projected earnings. You can then make adjustments throughout the year to avoid penalties for underpayment.
But as the sole proprietor of a small business, you are generally entitled to deduct a range of "ordinary and necessary" business expenses, including mileage if you are driving for a service such as Uber or Lyft (if they ever return to Austin), the cost of a cell phone used for business purposes, or the cost of cleaning or concierge services for a home you are renting out through online marketplaces like Airbnb or Homeaway. You can also deduct all of the commissions or service fees charged by online marketplaces.
It is therefore essential to keep detailed records and receipts on activities related to your business. If, for example, you offer rides in your own vehicle, you may want to use apps such as MileIQ to keep track of your mileage and expenses. If you purchased an item that you used for both personal and business activities, document in your records the percentage it was used for personal activities the percentage it was used for business activities.
It is important to be aware, however, that specific rules that apply to different kinds of sharing economy transactions. If, for example, you are renting out a room or a home—regardless of whether the rental space is in your primary residence or a second home—you do not owe Federal taxes on the income you earned if the space is rented out for 14 days or fewer per year. If, however, you rent the space for 15 days or more you will owe taxes on the income. Depending on how involved you are in managing your rental property, you may benefit more from using Schedule E rather than Schedule C in reporting your rental income.
If you earn income by renting out a room or apartment through Airbnb or another home-sharing marketplace, you may also have to pay local taxes or even a hotel tax, depending on your jurisdiction. And keep in mind that while many of your business-related expenses are deductible, you may forfeit other deductions, such as the home office deduction on a room that you occasionally rent out. As the profitability of your small business may depend on the taxes and fees you owe, it is essential that you track your tax liability as you earn, and seek professional advice if your situation is complex.
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