You may have heard about how ordinary, average people are now making a living through a variety of unusual jobs. These include renting a room in a house or apartment to overnight guests through Airbnb, or moonlighting as an on-call driver for Uber. You may already be participating in such a service, or are thinking seriously about starting. Before you do, consider the tax ramifications of earning income in the sharing economy.
Offering peer-to-peer services is the foundation of what has come to be known as the sharing economy. Providing rides, meals and lodging for a cost has spurred a growing industry, allowing virtually anyone to participate. These solutions for very modern living, however, come at an all-too-often hidden cost.
The Nature of Federal Income Tax
A frequently misunderstood aspect of federal tax is that it applies to any form of income you might receive. This accounts for the thousands of IRS notices sent each year to taxpayers who failed to disclose or pay taxes on income, from sources ranging from side jobs to race track winnings. The reality of federal income tax is not one that revenue earned in the sharing economy is exempt from; this is a growing point of concern among new peer-to-peer participants.
More Users Yield More Problems
Perhaps the single biggest inherent problem with services such as Uber and Airbnb is that they do not effectively communicate the tax obligations that fall upon users. If, for instance, you earn $5000 this year as an Uber driver, you might assume that this money is yours to keep. However, this income – just like that earned from any other source – must be reported and reconciled for tax purposes.
If this detail is overlooked, the IRS will use the reported information from the host service (remember, these online platforms may send detailed income information to the IRS) to assess what you owe. Unfortunately, by the time you realize just how much you owe in tax, you will likely be well into another tax season…which means another tax bill. This expensive, cyclical lesson has confounded users as ranks in the sharing economy continue to grow.
Reducing Your Taxable Income
One significant advantage of participating in the sharing economy is the opportunity to write off your expenses. If you’re involved in a driving service, for example, the money you spend on fuel, your cell phone, and vehicle maintenance – all may be tax deductible. This means that your tax obligation (the total amount subject to taxation) is reduced. This, in turn, means a smaller amount of income for the IRS to tax. It’s critical to keep physical receipts and documentation of every expense you intend to write off. Should the IRS decide to perform an audit, you will need this information in order to verify your purchases.
Securing Your Future
Getting a piece of the sharing economy for yourself can be a great way to supplement your income and, in some cases, completely support yourself. However, you should consider consulting with a licensed tax professional before doing so. This will ensure that your tax obligations are handled correctly and any IRS concern is resolved swiftly, allowing you to get back to business.