OVERVIEW
It's never been easier to earn a few extra dollars: Whether you drive for a ride-share company like Uber, rent out a room through a rental service such as Airbnb, or work for a company like TaskRabbit that outsources small jobs, errands and tasks—being a freelancer in the sharing economy means you may have one or more micro-enterprises or small businesses going on. And, just as your full-time job does, these endeavors often result in tax obligations people often overlook.
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Key Takeaways • You must report all income you earn in the share economy, whether it’s from Airbnb, Etsy, TaskRabbit, or any other source—including tips. • You can deduct ordinary and necessary expenses related to your business on Schedule C. If you use something, such as a cell phone, for both business and your personal life, you can only deduct the portion of the expense related to your business. • Since you’re self-employed, you’re required to pay both the employer and employee portions of your Social Security and Medicare taxes. • If you think you’ll owe $1,000 or more in taxes for the year, you may be required to make estimated quarterly payments to avoid underpayment of estimated tax penalties. |
If you were paid money, it's taxable income
Many people treat money received through sharing services as extra change in their pocket. Rosely Gradowski, an Airbnb host in Port Chester, NY, who rents out an apartment over her garage, shared her tax questions.
"I love Airbnb. Most of the time it's like having guests over. The whole process is usually painless, but sometimes it's hard to know which part of the transaction relates to taxes. They left a tip. Is that income? I made them breakfast. Is that a deductible expense? This is the first year I have to file...I hope I get it all right."
Opportunities to make money in a sharing economy can often seem like friendly side exchanges. However, the Internal Revenue Service (IRS) treats these as business transactions, so you’ll still need to pay income taxes on the money earned, even tips.
Keep track of your income
As a sharing-economy freelancer, it's your responsibility to keep track of the money you make and report it on your tax return. IRS Form 1099-K reports income processed through third-party networks, such as PayPal.
For tax years prior to 2023 the requirements for issuing a 1099-K are for total transactions:
- Exceeding $20,000, and
- Exceeding 200 transactions within the tax year
For tax years beginning with 2023, a third-party payment processor must report income to the IRS using Form 1099-K if your gross third-party network payments exceed $600 regardless of the number of transactions.
There is no threshold for payment card transactions such as credit card swipes.
So, there would be no Form 1099-K reporting requirement if you made $5,000 in 2022 on the side selling your handmade items on Etsy. However, there is a reporting requirement in 2023 since the amount exceeds the $600 limit. Regardless of whether a 1099-K is issued, you are still responsible for reporting that amount to the IRS by including it as self-employed income on part one of Schedule C.
Learn how to properly account for business expenses
To help make sure your side gig is profitable, take advantage of business expense deductions. Certain costs of doing business may be tied to your personal use of an asset, making it more difficult to determine what part of the expense can be deducted.
For example, if you’re a part-time handyman working for yourself or for an online service that doesn’t provide a cell phone, you may use your personal cell phone or tablet to communicate with clients, but only for a few hours a day.
Only the portion of the cell phone bill or Internet access that is used for the business is a deductible expense. Taking the time to compute the correct percentage used for business and deducting that amount against income, will lower your overall tax bill.
TurboTax Tip: Some sharing-economy companies make it easy for their independent contractors to track their income and some deductions on a user dashboard. Check to see if you have access to one.
Don't double-report expenses
While you want to find every business expense that you're allowed to deduct from income, be careful not to double report expenses, especially if you're involved in more than one freelancing activity.
For example, you're a freelance graphic designer with a home office, but you also rent your apartment through Airbnb for two months in the summer. For that time period, the rent on the apartment is a deductible expense for your Airbnb operation, not your activities as a graphic designer.
Be your own record keeper
The IRS requires business owners to keep adequate proof of income and expenses. Some sharing-economy companies make it easy for their independent contractors by tracking some of this information. Still, even if they don't, it’s important for you to keep track.
For instance, if in 2022 you’re an independent contractor for TaskRabbit, you should only receive a 1099-K form (for reporting your income) if:
- TaskRabbit sent more than $20,000 to your bank account
- and you had more than 200 payment transactions during a reporting year
However, in 2023, you should receive a 1099-K form if they process more than $600 in transactions regardless of how many transactions you have.
Even if you don't receive a 1099-K that doesn’t mean you can skip reporting the income if those requirements aren't met. You still have to report it come tax time.
Self-employment tax obligations are not optional
You may not think of yourself as self-employed as you engage in your sharing-economy gig, but the IRS does. Self-employed persons are considered both the employer and employee for tax purposes.
It's a good idea to check upfront if you're required to make quarterly payments, because failing to do so when you should have can result in fines and penalties.
With TurboTax Live Full Service Self-Employed, work with a tax expert who understands independent contractors and freelancers. Your tax expert will do your taxes for you and search 500 deductions and credits so you don’t miss a thing. Backed by our Full Service Guarantee. You can also file your self-employed taxes on your own with TurboTax Self-Employed. We’ll find every industry-specific deduction you qualify for and get you every dollar you deserve.
