Sharing economy (also known as the on-demand or access economy) is a fast-growing business model that allows providers to use online platforms and smart phones to easily connect with customers and rent a spare room, provide car rides, or provide other personal services. If you've ever rented out a room or vacation home on Airbnb, or provided rides with Uber or Lyft, then you are considered a sharing economy provider (essentially, a self-employed provider of personal services).
The sharing economy has completely transformed the way people commute, travel, and even tackle their to-do lists. While this is still a developing area of the economy, there are tax implications to consider.
Rules for Sharing Economy Providers
If you receive income from a sharing economy activity, it's generally taxable even if you don't receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you get paid as a side job or a part time business, and even if you are paid in cash.
A person who provides services to the general public and gets paid a fee is considered a sole proprietor. Unlike an employee, a sole proprietor does not receive a W-2 at the end of the tax year, and does not have any income tax withholding during the course of the year.
This means that sharing economy sole proprietors must either be prepared to face a big bill at tax time (including penalties and interest) or make regular estimated payments throughout the year. Estimated tax payments are due to both the IRS and state tax authorities each quarter (in April, June, September, and January). If you are a sole proprietor, you should send in at least what you anticipate owing in taxes to avoid a penalty later. If you don't pay enough tax through withholding, estimated tax, or a combination of both, you may be charged a penalty.
Sharing Economy Deductions
The good news is that some or all of your business expenses may be deductible—sharing economy sole proprietors can deduct ordinary or necessary business expenses from their business income. For example, if you rent out an apartment or vacation home for more than 15 days, all rent must be reported on your return. You can deduct certain expenses, including mortgage interest, property taxes, utilities, and renter's or homeowner's insurance premiums.
If you work as an Uber or Lyft driver, you can deduct car expenses at either the standard mileage rate (53.5 cents per mile for 2017), or your actual cost of expenses (including gas, insurance premiums, and parking fees). To deduct business driving, you'll need to keep track of business miles with an annual mileage log, and if you claim actual vehicle expenses, you must keep reliable written records of your expenses.
If you do provide services in the sharing economy, it's a smart idea to get professional help with your taxes. We can answer your questions and walk you through potential tax issues that may affect your tax return—contact us today.