Etsy, TaskRabbit, Uber, AirBnB, and numerous other technologies make earning a little extra income (or even a full-time income) easier than ever. Almost anyone can be a micropreneur these days, even if they started out just pursuing a hobby. The sharing economy or peer-to-peer economy is growing at a record pace by leveraging disruptive technologies. But a lot of people don't seem to understand how the sharing economy can impact their taxes, and the IRS has never issued any official publication regarding how to deal with the income and expenses from these new ventures. I can't cover every single aspect of tax law and how it applies to the sharing economy in this article, but here are some tips to get you started in the right direction.
- Any income is income. It's kind of sad to realize that this point needs to be made; but it is clear from my last tax article that not everyone thinks that all income should be declared. So let's get this one out of the way to begin with — ALL income, in whatever form you get it, has to be reported on your taxes. If not, it is tax fraud. That's about as straightforward as I can be about the income part of this equation.
- Estimated tax payments. No one is collecting taxes regularly on the income you make, so it is your responsibility to estimate your tax liability and pay it quarterly. At the end of the tax year, if you owe taxes and you didn't pay quarterly estimated tax, you might owe both penalties and interest payments along with your tax liability to the IRS. It is a good idea to keep those funds separate in your online savings account so they are available when you need them every quarter.
- You are your own employer. You can set your own hours, great! It also means that you have to pay the self-employment taxes, including the employer's part.
- Understand your tax forms. Depending on the technology you are using, you might be getting a 1099-K (AirBnB) or a 1099-Misc. (Uber) — but you might not get any tax form at all. Whatever form you get (or don't), the income still has to be reported.
The 1099-K became more commonplace as PayPal started issuing one to all the self-employed folks who used Paypal as a payment medium. AirBnB will send you a 1099-K if you rent out your room more than 14 days in a year. The 1099K is a form merchants use to report payments received via debit cards, credit cards and other third-party payment systems like PayPal.
The 1099 Misc. is used to report income earned by freelancers. Uber treats its drivers as independent contractors, so they issue a 1099 Misc. form. You will most likely be using Schedule C (unless you have incorporated a business and are not channeling your income via personal tax return) to report income you earned and expenses you incurred from your micropreneurial ventures. The Schedule SE is used to calculate your self-employment taxes.
- Keep all the records. You owe taxes on every dollar of income; and, likewise, you can also deduct every dollar of eligible business expenses. Here are some sample deductions that are available for different types of services (note that some of these expenses have to be depreciated over time and it also has implications when you sell your asset — house or car):
Rideshare service expenses
– Mileage (standard rate or actual cost)
– Parking fees, tolls
– Car-loan interest (or lease payments)
– Cell phone services
– Any advertising costs
– Car-cleaning costs
– Car insurance (the business-related portion)
– Maintenance costs
– Registration and taxes
– In-car entertainment
Home-sharing service expenses
– Rent or mortgage
– Professional cleaning services or cleaning supplies (if you clean the home, you cannot deduct the monetary value for your time; you can only deduct the money you spent on the cleaning supplies)
– Utilities (electricity, cable, internet, sewer, etc.)
– Food provided for your guests
– Insurance (the business-related portion)
– Repair costs, grounds-keeping expenses, replacement items (for example: worn-out bulbs in the rental room)
– All the host-related service fees like AirBnB's guest services fees (6 to 18 percent) and host-service fees (3 percent). Uber's commissions are fully deductible.
- Go local, very local. Usually, when we think of taxes, we think about federal and state returns; but in the case of some of these sharing-economy ventures, you have to dig deeper and check your county and city business tax laws too.
(In 2012, San Francisco required all AirBnB microprenuers to charge and pay the 14 percent transient occupancy tax that is usually only charged by hotels. There are many terms that refer to this tax — room tax, tourist tax, hotel tax, occupancy tax, lodging tax. Most cities have this kind of tax law, but very few — think San Francisco and Los Angeles — currently enforce this tax on AirBnB partners.)
Don't forget to check your local housing authority regarding zoning and your homeowner's association regarding its short-term rental rules.
- Get professional help. Tax preparation can get very confusing; but when you add in the fact that the IRS has been less than clear on how the whole shared-economy tax situation is supposed to be handled, it can get really complicated for someone just trying to make a few extra dollars in their free time. The tax software is starting to handle some of these issues; but from my research, they are not thorough by any means.
To maximize the return and to avoid errors, it might be best to consult a tax professional. But the trick here is to find the right professional. Many CPAs don't follow the new technologies. You want someone who has successfully handled taxes with shared-economy income. Out of the 10 CPAs I called in my city, not a single one had dealt with this type of income; most of them had not even heard of these companies. The best way I found to get help is to join a Facebook group focused on your platform. For example, there is an Uber Drives Facebook group that discusses all the issues and matters related to Uber. If you ask for advice in the group to recommend a CPA, you can save a lot of time and headache.
- Check your insurance: Not a tax tip per se, but I believe it is essential to understand the insurance implications along with the tax implications of this type of work, so let me squeeze this topic in here. If you are renting out your home, you should have additional homeowners insurance to cover any situation that could arise while you have a tenant. Yes, they can sue you if they fall accidentally in your house — and your regular homeowner's insurance won't cover that. (I checked!) Similarly, if you are in an accident while you have an Uber customer, your normal car insurance won't cover any part of that.
Bottom line, whether you do this as a hobby, a side hustle or as a full-time job, you have to treat your income-producing venture as a business and do everything necessary to keep your business in good standing. That includes understanding your taxes, keeping good records, having adequate insurance and, last but not least, keeping business and personal finances separate.
Do you make any money using the shared-economy business model? How are you handling your taxes? Do you have any advice for your fellow micropreneur?