If you rent out a room to others using airbnb or a similar site, if you drive your car for Uber (or an alternative), or if you otherwise take part in the sharing economy, the money you earn may be taxable. (Psst: Even if you get paid in cash without any record of the transaction, you still may be liable for income tax on the earnings.) This is true whether this is a one-time thing or if you treat it like a side-gig. Plus, if you don’t earn cash but rather get something else of value in exchange (such as a barter transaction), there is likely taxable income on the transaction.
Recently the IRS issued a Tax Tip 2017-39 which addresses the sharing economy and taxes. Given that these transactions are often a minor side action for a lot of participants, some folks may not realize that this income is taxable.
Any time you take monetary value in exchange for goods and services, the value you’ve received is gross income. There may be deductions allowable depending on what is provided, which would potentially reduce the taxable income on the transaction. Deductibility of expenses related to renting your personal home can be complicated, so you might want to bone up on those rules. See below for the actual text of the Tip from the IRS on taxes in the sharing economy:
Keep in Mind These Basic Tax Tips for the Sharing Economy
If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides or a number of other goods or services, they may be involved in the sharing economy. The IRS now offers a Sharing Economy Tax Center. This site helps taxpayers find the resources they need to help them meet their tax obligations.
Here are a few key points on the sharing economy:
- Taxes. Sharing economy activity is generally taxable. It does not matter whether it is only part time or a sideline business, if payments are in cash or if an information return like a Form 1099 or Form W2 is issued. The activity is taxable.
- Deductions. There are some simplified options available for deducting many business expenses for those who qualify. For example, a taxpayer who uses his or her car for business often qualifies to claim the standard mileage rate, which was 54 cents per mile for 2016.
- Rentals. If a taxpayer rents out his home, apartment or other dwelling but also lives in it during the year, special rules generally apply. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxpayers can use the Interactive Tax Assistant Tool, Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.
- Estimated Payments. The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year to cover their tax obligation. These payments are due on April 15, June 15, Sept. 15and Jan. 15. Use Form 1040-ES to figure these payments.
- Payment Options. The fastest and easiest way to make estimated tax payments is through IRS Direct Pay. Or use the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). 98005
- Withholding. Taxpayers involved in the sharing economy who are employees at another job can often avoid making estimated tax payments by having more tax withheld from their paychecks. File Form W-4 with the employer to request additional withholding. Use the Withholding Calculator on IRS.gov.
Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
*Originally published here.
Jim Blankenship, CFP®, EA is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Illinois. He provides expert guidance for your Retirement, Education Funding, and Income Tax issues and concerns. In addition to his blog “Getting Your Financial Ducks In A Row”, you’ll find Jim’s writings all around the internet, as he is a regular contributor to Forbes.com, TheStreet.com, and FiGuide. Several other sites also republish his work. He has also written An IRA Owner’s Manualand A Social Security Owner’s Manual – both books provide comprehensive guides to these vexing subjects.
Contact Jim: 630-40-DUCKS (630-403-8257) [email protected]
Buy Jim’s Books here
Follow Jim on Social Media: