Uber, Lyft, Airbnb, Etsy, Rover, TaskRabbit. If you've taken advantage of these services—or provided them to others—you're a member of the sharing economy. If you've only used these services (and not provided them), there's no need to worry about the tax implications. But if you've rented out a spare room in your house through a company like Airbnb, you're probably collecting a fee. A portion of this goes to the company (in this example, Airbnb) while you keep a portion for providing the service. Whether this is your full-time job or a part-time gig to make some extra cash, you need to be aware of the tax consequences.

Though Millennials are the number one users of the sharing economy, Gen X and Boomers participate as well. A recent PWC study found that 24 percent of Boomers aged 55 and older are also providers. While many are looking to earn a bit of extra income, some dive in full-time hoping they can make a living, and still more simply enjoy meeting new people or providing a service that helps others. What most people don't realize is that this extra cash could impact their taxable income—especially if they already have a full-time job with a traditional employer.

In other words, that extra income might turn into a tax liability once you figure out your tax bill. To avoid surprises at tax time, it's more important than ever to be proactive, understand the tax implications of your new sharing economy gig, and seek the advice of a competent tax professional.

If you have a job with an employer, make sure your withholding reflects any extra income derived from your side gig (e.g. boarding pets at your home through Rover or driving for a rideshare company like Uber on weekends). Use Form W-4, Employee's Withholding Allowance Certificate, to make any adjustments, and then submit it to your employer. They’ll figure out the amount of federal income tax to be withheld from your pay.

NEW BUSINESS OWNER

While you may not necessarily think of yourself as newly self-employed, the IRS does. Even though you work for a company like Airbnb or Rover, you are technically considered a business What do you need to know about the sharing economy? As such, you are responsible for your own taxes (including paying estimated taxes if necessary). It's up to you to keep track of income and expenses—and of course, to keep good records that substantiate your income and expenses (more on this below). 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.

And now for the good news. As a business owner, you are entitled to certain deductions (subject to special rules and limits) that you cannot claim as an employee. Deductions reduce the amount of rental income subject to tax. You might also be able to deduct expenses directly related to enhancements made exclusively for the comfort of your guests. For instance, if you rent out a room in your apartment through Airbnb, money spent on window treatments, linens, or even beds could be deductible.

IT'S MORE COMPLICATED THAN IT SEEMS

At first glance, renting out a spare room through Airbnb or pet sitting through Rover looks like a simple way to earn extra cash. However, it's more complicated than it seems. You'll need to keep an eye out for the following pitfalls:

• Insurance requirements
• Business license registration (state or municipal)
• Room and lodging, or tourist taxes: many municipalities charge these taxes on the amount of rental paid for short-term stays (less than 30 days). Noncompliance may result in penalties, fees, and payment of back taxes owed.
• Failure to set aside money for taxes and/or estimated tax payments: estimated tax payments apply to both income tax and self-employment tax (Social Security and Medicare). If you don't pay enough tax, through either withheld or estimated tax (or a combination of both) you may have to pay a penalty. Estimated tax payments are due quarterly. 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.
• Not receiving tax forms from a company you provide services for: as a sole proprietor, you may receive a Form 1099-MISC or a Form 1099-K. These forms report income to you and to the IRS. If you receive these forms, you should retain them and use the information reported in conjunction with your other tax records to determine your correct tax.
• Renting out a home for more than two weeks: if you receive rental income for the use of a house or an apartment, including a vacation home, for 15 days or more, that rental income must be reported on your return in most cases. You may deduct certain expenses such as mortgage interest, real estate taxes, maintenance, utilities, insurance, and depreciation. If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses based on the number of days used for each. You won't be able to deduct your rental expense in excess of the gross rental income. Generally, if you rent out your home for less than 15 days, you do not need to report any of the rental income, but you can’t deduct any expenses as rental expenses.

RECORDKEEPING

It's important to keep good records and to choose a recordkeeping system suited to our business that clearly shows your income and expenses. The type of records you need to keep for federal tax purposes depends on what kind of business you operate; however, at a minimum, your recordkeeping system should include a summary of your business transactions (i.e. income and expenses) using a cash basis of accounting.

Tax rules are complicated: don't get caught short. If you have any questions or would like more information about the sharing economy and your taxes, please contact us.

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Thanks to our friends at Spoelman, Hovingh, and Feldt, Inc. for sharing this information.