Tax Memo – Shared Economy Issues – UBER, AIRBNB & Other Entrepreneurs

Note From Chris Whalen, CPA: This memo includes important information for all entrepreneurs as well as those participating in the Sharing Economy.

If you use one of the many online platforms available to rent a spare bedroom (AIRBNB), provide car rides (UBER), or to connect and provide a number of other goods or services, you’re involved in what is sometimes called the sharing economy.

An emerging area of activity in the past few years, the sharing economy has changed how people commute, travel, rent vacation accommodations and perform many other activities. Also referred to as the on-demand, gig or access economy, the sharing economy allows individuals and groups to utilize technology advancements to arrange transactions to generate revenue from assets they possess – (such as cars and homes) – or services they provide – (such as household chores or technology services). Although this is a developing area of the economy, there are tax implications for the companies that provide the services and the individuals who perform the services.

This means 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 do it as a side job or just as a part time business and even if you are paid in cash. On the other hand, depending upon the circumstances, some or all of your business expenses may be deductible, subject to the normal tax limitations and rules.

I encourage everyone participating in the sharing economy to understand the potential tax issues affecting them.

The following tax issues may apply to those participating in the sharing economy:

Issues for Individuals Performing Services

Taxpayers in the sharing economy need to keep several tax components in mind throughout the year, not just when it comes time to file the tax return. Important areas include these:

Filing Requirements

Whether or not you participate in the sharing economy, if you received a payment during the calendar year as a self-employed individual, an employee or a small business, you may be required to file a tax return to report that income to the IRS. This includes payment received in the form of money, goods, property, or services.

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Employee or Independent Contractor

If you are providing services and are not certain whether you are an employee or independent contractor, more information is available in Publication 1779 – Independent Contractor or Employee?.

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Tax Payments: Those in Sharing Economy May Need to Make Estimated Payments

You may make estimated tax payments to pay tax on income that isn’t subject to withholding (such as income from self-employment and rental activities). You may also make estimated tax payments to avoid penalties if the amount of income tax withholding from your salary, pension or other income is not enough to cover your tax for the year.

Taxes are pay-as-you-go, and making estimated tax payments is HOW you pay-as-you-go. Taxpayers use estimated tax payments to pay both income tax and self-employment tax (Social Security and Medicare). If you don’t pay enough tax, through either withholding or estimated tax, or a combination of both, you may have to pay a penalty. The payment of estimated tax for the income for the first quarter of the calendar year (that is, January through March) is due on April 15. Payments for subsequent quarters are due on June 15, September 15 and January 15. If you don’t pay enough by these dates you may be charged a penalty even if you’re due a refund when you file your tax return.

If you also work as an employee, you can often avoid needing to make estimated tax payments by having more tax withheld from your paycheck. This may be a particularly attractive option if, for example, your sharing economy activity is merely a side job or part-time business. To do this, fill out a new Form W-4 and give it to your employer. The Withholding Calculator is a helpful resource.

Example: You file as head of household claiming a dependent son. You take the standard deduction and you expect no refundable credits for 2016. For all of 2016, you worked full-time as an office manager and earned wages from this employment. During the last half of the year, you also went to work for a company that provides transportation through an app request and earned $10,000. Federal taxes were not withheld from these earnings.

Your adjusted gross income (AGI) for the year is $95,250. In 2015, your AGI was $74,325 and your federal tax liability was $8,591. You use the Estimated Tax Worksheet and estimate your 2016 federal tax liability to be $11,015. You only had $8,500 in withholding from your wages from your employment as an office manager.

Since your federal tax withheld of $8,500 is less than your total tax for 2015 and your federal tax withheld is less than 90% of your estimated tax ($11,015 x 90% (.90) = $9,913.50), you must increase your withholding or pay estimated tax for 2016. If not, you can expect to be subject to the Estimated Tax penalty when you file your return.

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Self-Employment Taxes

Self-employed workers are taxed differently from employees. Self-employed individuals (e.g., independent contractors) must pay self-employment tax. Self-employment tax consists of Social Security and Medicare taxes, and with no employer-matching of these taxes, self-employed individuals pay the full amount of Social Security and Medicare taxes themselves. However, don’t confuse it with income tax or estimated taxes.

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Depreciation

Depreciation is an income tax deduction for wear and tear and deterioration of property with a life longer than a year. It’s an annual allowance that lets you recover, over time, the cost or other basis of certain property you own. The kinds of property you can depreciate include machinery, equipment, buildings, vehicles and furniture. You can’t claim depreciation on property held for personal purposes. If you use property, such as a car, for both business or investment and personal purposes, you can depreciate only the business or investment use of that property. Other special rules and limits often apply, especially if you are an employee rather than an independent contractor. In some instances, you may qualify for one of the simplified options, such as the standard mileage rate for business use of a car or the simplified method for claiming the home office deduction.

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Rules for Home Rentals

If you receive rental income for the use of a house or an apartment, including a vacation home, that rental income must be reported on your return in most cases. You may deduct certain expenses, but special rules and limits often apply. These deductible expenses, which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation, reduce the amount of rental income that is subject to tax.

If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won’t be able to deduct your rental expense in excess of the gross rental income limitation.

Example: You used an online app to rent a room in your house 73 days last year, or 20% of the year. The room is 12 × 15 feet, or 180 square feet. Your entire house has 1,800 square feet of floor space. You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use, divided again by the percentage of the time the room was available for rent during the year. If your heating bill for the year for the entire house was $600, $12 ($600 × .10 × .20) is a rental expense. The balance, $588, is a personal expense that you cannot deduct

Example: For the purposes of this example, assume that you are using the rental property in the capacity of a self-employed individual. On April 6, you bought a 2000 sq. ft. house to use as a rental property. You do not use the property as your personal residence. You planned to use an online app to advertise and to rent the house for short durations on a full-time basis. You made several repairs and had it ready for rent on July 5. At that time, you offered the house for rent through the online app. The house is considered placed in service in July when it was ready and available for rent. You can begin to depreciate the home’s cost in July.

Example: You repair a small section on one corner of the roof of a house you rent out full time through an online vacation rental application. You deduct the cost of the repair as a rental expense. However, if you completely replace the roof, the new roof is an improvement because it is a restoration of the building. You depreciate the cost of the new roof

There’s a special rule if you use a dwelling unit as a personal residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses. If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services don’t include such things as heat and light, cleaning of public areas, or trash collection.

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Business Expenses

The tax code allows you to deduct certain costs of doing business from gross income. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).  If you are an employee of the transportation company the business portion of the auto expenses related to that job may be deducted only to the extent those expenses exceed 2 percent of your adjusted gross income.

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.  If you are providing services as an employee of the company, the business portion of the auto expenses related to that job may be deducted only to the extent those expenses exceed 2 percent of your adjusted gross income.

It’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

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Form 1099-K, Payment Card and Third Party Network Transactions

Form 1099-K, Payment Card and Third Party Network Transactions, is an information return that reports the gross amount of reportable payment card and third party network transactions for the calendar year to you and the IRS.  If you receive a Form 1099-K, you should retain it and use the information reported on the Form 1099-K in conjunction with your other tax records to determine your correct tax.  

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Issues for the Companies Providing Services

Companies providing services in the sharing economy should consider several employment tax issues:

Determining Whether the Individuals Providing Services are Employees or Independent Contractors

This is an important question for taxpayers who are paying others for providing their services in the sharing economy. Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services.

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Employer/Payer Employment Tax Obligations

Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.

Example: You start your own business that takes product orders online and your employees fill the orders and deliver them to your clients. The first thing you have to do is to get an Employer Identification Number (EIN). You can get your EIN online.

In general, as an employer you must deduct and withhold from each employee’s wages federal income tax and the employee’s share of social security and Medicare taxes. The employer must use the Electronic Federal Tax Payment System (EFTPS) to deposit federal income tax withholding, and both the employer and employee shares of social security and Medicare taxes. You must use either a monthly or a semi-weekly deposit schedule. Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. To determine your payment schedule, review Publication 15 for Forms 941, 944 and 945, or Publication 51 for Form 943. If you fail to make a timely deposit, you may be subject to a failure-to-deposit penalty of up to 15 percent. Generally, you are also liable for Federal Unemployment Tax Act (FUTA) taxes based upon the wages paid to an employee. Once the cumulative liability for FUTA tax exceeds $500, you must deposit that tax with respect to the quarter when the liability exceeded $500.

Example: You run a car service where your customers request rides through your mobile application and your employees provide the transportation services. In addition to withholding and depositing employment taxes during the year, you must prepare and file Form W-2, Wage and Tax Statement to report wages, tips and other compensation paid to an employee. Use Form W-3, Transmittal of Wage and Tax Statements to transmit Forms W-2 to the Social Security Administration. Additionally, in general, you must file Form 941, Employer’s Quarterly Federal Tax Return each quarter. The Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, must also be filed annually

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Payment Card and Third Party Network Transaction Reporting

Section 6050W of the Internal Revenue Code requires payment settlement entities to report payment card and third party network transactions to recipients of payments and the IRS.  Payment settlement entities make these reports on Forms 1099-K, Payment Card and Third Party Network Transactions.  Please note that if you are an employer paying wages to employees, those wage payments should be reported on Forms W-2 and not on Forms in the 1099 series.

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Chris Whalen, CPA
(732) 673-0510
79 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com

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2017-07-31T09:07:36+00:00

About the Author:

I’m Chris Whalen, CPA. For over twenty-five years I have been the owner and Managing Member of a Certified Public Accounting and Business Advisory firm providing a full range of income tax, accounting and advisory services for individuals and businesses. I am licensed in all states and serve clients throughout the country but extensively in Red Bank, Middletown, Rumson, Colts Neck, Holmdel, Monmouth County and Ocean County.