As you know, the so-called sharing economy uses the Internet and other technology advances to facilitate a variety of transactions, such as car sharing (e.g., Uber and Lyft), vacation property rentals (e.g., Airbnb), apartment rentals, freelance work, and crowdfunding. Since the sharing economy is now a big deal, the tax issues have become a big deal too. However, indications are that sharing economy participants need help with those tax issues. According to a recent survey, 34% of those who reported earning income in the sharing economy did not know they needed to make quarterly estimated tax payments, 36% did not understand what records they should keep for tax purposes, 43% percent did not set aside money to meet their tax obligations or know how much they owed, and 69% did not receive any tax information from the sharing economy platform they used to earn their income.
Income and Deductions
If you receive income from a sharing economy activity, it is generally taxable—even if the activity is a sideline and even if you are paid in cash and do not receive a Form 1099-MISC (Miscellaneous Income), 1099-K (Payment Card and Third Party Network Transactions), W-2 (Wage and Tax Statement), or other information return that reports income to you and to the IRS. Those with positive taxable income from sharing economy activities may also face state and local income taxes. On a positive note, some or all of your sharing economy-related expenses may be deductible as business expenses.
Home Sharing
Special tax rules apply if you rent a property that you also use as a residence during the year. Rental income must usually be reported in full. Most expenses must be divided between personal and rental usage, and deduction limits may apply. Also, those who rent out their properties may owe state and local occupancy taxes, room taxes, or hotel taxes.
Estimated Tax Payments
If you have profits from the sharing economy, you may need to make quarterly estimated tax payments to cover the additional taxable income and related self-employment tax. Estimated tax payments for the 2017 tax year are due on 4/18/17, 6/15/17, 9/15/17, and 1/15/18.
Tax Penalties
Those who participate in the sharing economy and fail to meet their federal tax filing and payment obligations can face a host of potentially expensive penalties, such as the penalty for failure to make adequate estimated tax payments, the late payment penalty, the failure-to-file penalty, accuracy-related penalties for faulty tax return filings, and more.
Business Entity Considerations
When a sharing economy activity becomes significant, you may want to establish a liability-limiting entity to operate the activity. Different entities have different tax implications.
Conclusion
We can assist you with all these sharing-economy related tax issues. Please contact us if you have questions or want more information. We are here to help.