June 15, 2017
Do you provide car rides through a mobile app, rent out your spare room using an online platform or repair computers for local businesses on demand? If so, you may be considered part of the “sharing economy” (also known as the Gig or on-demand economy).
Participation in this emerging method of distributing services can be a good way to earn money in your down time, pursue a more flexible lifestyle and provide cash to offset the expenses associated with owning a vehicle or a home. The IRS recently offered some guidance for this rising trend. Here’s a summary of the key points.
Employee vs. Independent Contractor
First and foremost, there’s no free tax ride. Uncle Sam wants his cut of your earnings from any sharing economy activity — and your state tax agency may be eyeing it, too. The good news is that some of your tax liability could be offset by deductible business expenses.
When providing on-demand services, you’ll generally be classified as an independent contractor, rather than an employee. Certain exceptions apply — for example, if you’re a corporate officer of the firm providing the service.
Employees receive W-2 forms from their employers. But contractors will usually receive 1099 forms for participating in the sharing economy jobs, which must be reported on Schedule C on the individual’s federal tax return. The type of 1099 form depends on the volume of your activities. The company will issue:
- Form 1099-MISC if you only occasionally provide services, or
- Form 1099-K if you had more than 200 transactions and received at least $20,000 in payments for the year.
Instead of having taxes regularly withheld from their paychecks, self-employed contractors must make quarterly estimated tax payments to the IRS. Otherwise, they could be assessed tax penalties and interest on the amounts that weren’t paid, as well as any regular tax that’s owed. These adverse consequences could happen even if a contractor is ultimately entitled to a tax refund at the end of the year.
Taxes are a “pay-as-you-go” proposition. Self-employed taxpayers often rely on estimated tax payments to pay both their income tax liability and self-employment tax (the equivalent of FICA tax for employees). Payments must be made quarterly according to the IRS schedule:
- First estimated payment is due on April 15,
- Second estimated payment is due on June 15,
- Third estimated payment is due on September 15, and
- Fourth estimated payment is due on January 15 of the following tax year.
These deadlines move to the next business day if the due date falls on a weekend or a holiday. For example, the estimated payment for the fourth quarter of 2017 is due on Tuesday, January 16, 2018, because Monday, January 15, 2018, is Martin Luther King Day.
Some taxpayers participating in the sharing economy may have another option: The requisite amount of tax can be paid through any combination of estimated tax payments and regular income tax withholding. Therefore, if you’re employed at another job, you could increase your withholding to compensate for the extra tax you’ll owe from your sharing economy job. Simply fill out a revised Form W-4 and submit it to your employer. Your tax advisor can help you figure out the right amount of incremental withholdings.
Depending on your circumstances, you may be able to claim deductions for expenses incurred to provide on-demand services. What costs qualify? In general, a business expense must be “ordinary and necessary” or the IRS won’t allow you to deduct it. Consider the following examples.
Drivers. Typically, the biggest expense for drivers on Uber, Lyft and other ride-sharing apps is vehicle depreciation. Subject to the annual limits for luxury cars, you may be able to write off at least some of the vehicle’s cost over time, based on the percentage of business use. In addition, you may deduct other operating expenses, such as gas, oil, insurance, car washes and repairs.
There’s a simplified alternative to keeping detailed records that are required for deducting actual expenses (including depreciation): You may use the IRS flat rate of 53.5 cents per business mile in 2017. Under this alternative, you can also deduct related tolls and parking fees.
Landlords. If you will take an extended vacation this year, have an unused spare room or own a second home, you might rent the unoccupied property to a tenant through an online platform, such as Airbnb, HomeAway or VRBO.
Deductions for rentals are limited to the amount of rental income if your personal use of the residence exceeds the greater of 14 days or 10% of the time the place is rented out. But, if you rent out a place for 14 days or less, there are no tax consequences: You don’t have to report the income, but you can’t claim deductions either.
When renting out property, beware of the rules for hotels and bed-and-breakfast properties. If you provide substantial services primarily for the guest’s convenience, such as regular cleaning, changing linen or maid service, you may be classified as running a hotel business. This classification could increase your tax liability, but your tax pro may have suggestions to avoid that pitfall. For example, you might consider charging a separate cleaning fee at the end of the rental, rather than providing complementary daily maid service.
Office space. To save overhead expenses, some small business owners opt to share office space, especially in high-priced business districts, through sharing platforms like WeWork. Essentially, the company rents out space in an office building and finds tenants to sublet smaller units. Each tenant maintains a desk, a computer and other essentials. But tenants collectively share common amenities, including a kitchen, lobby and general receptionist. As an added benefit, professionals who share office space can network with other like-minded professionals, which may lead to joint ventures and other forms of collaboration and revenue-sharing.
For tax purposes, you can deduct 100% of your shared office expenses. This option may be easier and subject to fewer limitations than home office deductions.
Professionals. The sharing economy isn’t just for people who own hard assets, such as vehicles or real estate, or who perform manual labor, such as the services of a housekeeper or handyman. Increasingly, professionals — including attorneys, physicians and computer programmers — are participating in the Gig.
A major expense for these professionals is the vehicle used to travel to and from freelance assignments. Additionally, they may be able to deduct at least some of the costs of electronic devices — such as tablets and smartphones — based on the percentage of business use.
The tax rules that govern sharing economy activities are still evolving. Contact your tax pro for additional guidance. Although the standard principles for self-employed individuals generally apply to people with sharing economy jobs, there are some exceptions and subtle nuances. Your advisor can help ensure that you’re in compliance with the latest rules.