If you make income through Uber, Airbnb, or TaskRabbit, you are part of the sharing economy - also known as the on-demand, gig, or access economy. In recent years, the sharing economy has greatly impacted how we commute, find travel accommodations, and get many other activities done.
The sharing economy consists of workers that are participating in the service economy by “sharing” their resources either part-time or full-time. Some common examples are cab services, delivery services, short-term rentals, and home services.
You should know there are tax considerations for working in this growing gig economy, just as with any freelance workers who face the same tax challenges. Many workers in the sharing economy are unaware of their tax responsibilities, and the majority of the service provider companies are not training their new workers on their tax responsibilities.
Since tax compliance is a problem in the on-demand economy, the IRS launched the Sharing Economy Tax Center on their website to help this growing group of workers. Here are tips to keep you out of hot water:
Employee or contractor? You need to know which of these defines your employment arrangement as your personal tax obligations are different under each scenario. As an employee, the service company is responsible for paying the business portion of Social Security and Medicare. They will pay unemployment taxes. They will also withhold your portion of Social Security, Medicare, federal taxes, and state taxes and send them in for you. These payments are reported to you on a W-2. This is not the case if you are a contractor.
Social Security and Medicare. All employers are required to pay Social Security and Medicare taxes. As an independent contractor, you will need to reserve 12.4% of your net income for Social Security and 2.9% for Medicare payments.
Income Taxes. Whether the payments are in cash or you receive a 1099 or W2, the activity is taxable. You might need to start sending in quarterly estimated tax payments to avoid penalties when you file your tax return. If you are employed elsewhere, you can often avoid making estimated tax payments by having more tax withheld from your paycheck. Some gig workers may be subject to other taxes including unemployment taxes.
Depreciation. You are able to expense a portion of the cost of capital assets (like your car) if they are used for business purposes. However, if it's also used for personal use, you will need to adjust the amount available for depreciation.
Special tax rules. Other areas of the tax code have special provisions. The most common of these is use of your home for business or rental. For example, if you rent out your home but also live in it during the year, special rules may apply. Also, there are some options available for deducting business expenses for those who qualify.
Contact us for help if you have tax questions about working in the sharing economy.