How to Pay Taxes in a Sharing Economy? (Uber, AirBnB, Ebay, etc.)

If you’ve ever thought of renting part of your home to strangers, driving your car for hire, or selling your arts and crafts on-line, paying taxes is probably the last thing on your mind.   Whether you call it the sharing economy, the gig economy, or peer-to-peer services, all of these on-demand platforms are a growing part of our economy and the U.S. Treasury wants in on it.  The internet that enabled the Beanie Baby Bubble has morphed from eBay, Amazon, Etsy and Airbnb to mobile on-demand services like Lyft, Uber, TaskRabbit and DogVacay.  This huge online and mobile marketplace is getting larger every day, with more opportunities for individuals to earn income outside of traditional sources.

Case in point:  A new report based on an analysis of corporate expense reports found that Uber now accounts for 52% of all expenses in the ground transportation category.  And while big hotel chains still dominate the hotel expense category, Airbnb has doubled its share of transactions each year since 2014.  The IRS is taking notice.  In 2016, it debuted a new webpage called the Sharing Economy Resource Center  (https://www.irs.gov/uac/irs-launches-new-sharing-economy-resource-center-on-irsgov), filled with tips and resources to keep those budding entrepreneurs tax-compliant.

It has never been easier to make money on your excess capacity, whether that capacity is in the form of a car, home, bicycle or your time.  The trouble is, the owners of these micro-businesses often don’t realize they are actually small business owners and obligated to pay taxes like everyone else.  The fact that they often don’t receive traditional tax documents only compounds the issue.  These traditional tax forms include:

Even if you don’t receive any of these tax forms, you generally must pay taxes on the income earned in the online and mobile marketplace.  This is nothing new – these tax rules have always been around for small business owners and self-employed individuals. You could think of it as the IRS rebranding the tax code for a new market.   Here are some key compliance points, which are discussed in-depth on the IRS resource center:

Filing requirements – If you received any payments during the calendar year, you may be required to file a tax return to report the income to the IRS.  That usually means filling out a separate schedule that gets attached to your individual tax return, Form 1040.  If you sell goods or services, use Schedule C.  For home rentals, use Schedule E.

Recordkeeping – You must keep records to support your income and tax deductions.  While the IRS doesn’t specify what these records should look like, they must be organized and able to be produced in the event of an IRS audit.  Records should be kept for at least 3 years.  Records for any assets used in the business (for example, equipment, vehicles or real estate) should be kept until 3 years after you dispose of the property.

Estimated taxes – Taxes are “pay as you go”, meaning they must be paid throughout the year as you earn income.  When you work as an employee this is easy, because your employer withholds taxes from your paycheck and remits them to the appropriate taxing authorities.  If you don’t have taxes withheld, you are required to pay them quarterly on April 15, June 15, September 15 and January 15 for a particular calendar year.  The IRS has a Direct Pay website that enables you to pay the taxes directly from a checking or savings account at no cost to you.

Self-employment taxes – The self-employment tax rate is 15.3% of net earnings (basically income minus deductions) and is in addition to regular income taxes.  This tax covers payments into the Social Security and Medicare systems.  As an employee, you pay half of this tax through payroll deductions and your employer pays the other half.  When you are self-employed, you pay the entire 15.3 percent.  This tax must be included in your quarterly estimated tax payments.

Tip: If you are generating income from an online or mobile platform while working a regular job, the easiest way to pay the taxes on your extra income is to increase your tax withholdings enough to cover both the income tax and self-employment tax.  You do this by giving your employer an updated W-4 Form.

Depreciation – You might be entitled to a deduction for wear and tear of any income-generating property you own.  The IRS has tables you can use to figure out the amount of the deduction.  If you use the property for both business and personal use, you are allowed a deduction on just the portion you use for business.

Home rentals – If you rent out your primary home for less than 15 days a year, you don’t have to report the income.  But renting for less than 15 days wouldn’t translate into a very successful Airbnb listing, would it?  Anything more than this is considered a full-fledged business and the rental from a house, apartment or vacation home must be reported on your tax return.  You generally can deduct expenses such as mortgage interest, real estate taxes, maintenance, utilities, insurance and depreciation, which reduces  the amount of rental income that is subject to tax.  As mentioned previously, if you use the dwelling for both rental and personal purposes, you must divide your expenses between the rental use and the personal use based on the number of days used for each purpose.  It is important to keep accurate records of the days rented (see Recordkeeping, above).

Even though only an estimated 25-30% of business operators work for an on-demand platform full-time, it can be a viable way to build and create wealth in the new economy.  Not to be overlooked is the fact that net earnings count as income for purposes of contributing to an Individual Retirement Account (IRA).  You can set up a SIMPLE IRA (Savings Incentive Match Plan for Employees), even if you have no employees, to potentially save and invest even more for retirement…a retirement in which you can easily continue to work in the “gig” economy.