Top 6 Tax Tips for Sharing Economy Freelancers
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.
Key Takeaways
- You are required to 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.
The IRS is gradually phasing in new 1099-K reporting requirements for payments from third-party processors like Venmo and Paypal. In 2021, Congress changed the reporting threshold from over $20,000 in payments and more than 200 transactions to over $600 in payments regardless of the number of transactions. But instead of using the new $600 threshold right away, the IRS applied the previous reporting threshold for the 2022 and 2023 tax years. For the 2024 tax year, the IRS plans to use a $5,000 threshold, regardless of the number of transactions. The tax agency hasn’t announced its plans for after 2024 yet. On the other hand, some states have already started using the $600 threshold for their own reporting requirements.
There is no threshold for payment card transactions such as credit card swipes.
So, under the proposed rule changes, you should receive a Form 1099-K if you make $5,000 in 2024 on the side selling your handmade items on Etsy. 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. Even if you don't receive the information, 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.
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