The last two weeks, we’ve looked at the tax consequences of participating in the sharing economy. Specifically, we looked at renting out a room for the night, and getting paid to give somebody a lift.
Finally, we’re going to do a quick overview of providing services (through a site like Taskrabbit) or renting out our personal property (though a site like Snapgoods). As we’ll see, both of these are pretty straightforward from a tax perspective.
If you’re offering to provide services for pay, then you’re generally going to be considered self-employed. This means a couple things, some good and some not so good.
First, the not so good. As a self-employed individual, you’re subject to Self-Employment Tax of 15.3% on all of your net earnings. This is in lieu of the FICA tax you would pay on wages if you were paid as an employee. This might come as a surprise if you don’t have a lot of income and aren’t expecting to have a tax liability…for example, if you have only $10,000 of income, you normally wouldn’t have any income tax liability after applying the standard deduction and your personal exemption. But, if the $10,000 is all self-employment income, then you might be surprised to find you owe over $1500 in tax!
However, there is good news. If you incur any expenses related to earning this income, you can deduct those directly against the income to reduce your net self-employment income. If you have a dedicated space in your home that you use exclusively for setting appointments, performing administrative tasks, or possibly doing the actual work you’re getting paid for, you probably have a home office that generates some deductions. Also, if you work from a home office, you can deduct mileage or transit expenses to get to client locations when you work from there. So be sure to keep track of your travel and other expenses…if in doubt, keep track of it, and ask a professional at the end of the year when you do your taxes.
Now, if you’re renting out personal items (lawn-mower, bike, etc.), this might be the easiest item of all to report. If you only occasionally rent out personal items, then you simply report these as “Other Income” (line 21 of Form 1040, if you’re filling out the forms directly). There usually aren’t many expenses to deduct for this kind of rental, but if you do have expenses, these would be deducted as an “Other Adjustment” that reduces your income (line 36 of Form 1040 with “PPR” written in, if you’re filling out the forms directly).
You have to be careful with this activity, however. If you rent out personal property on a regular and on-going basis, you might deemed to be “in the business” of renting personal property. There’s no bright-line test here, but if you find that every weekend you’re bringing in money from renting out personal items, you might be “in business.” And if you’re in business, then you’ll be subject to the self-employment tax. In that case, see the discussion above for deducting expenses to reduce your net earnings subject to self-employment tax.
So there you have it. There’s many advantages to the sharing economy, and it’s a great way to make some extra cash from items that would otherwise sit unused. And hopefully from these tips here, you can reduce the bite at tax-time.
UPDATE: I received a question from a reader about how to treat renting out a car that you don’t actually drive. If you’re not doing the driving (a situation discuss in the last article), then this is actually no different than the situation above where you rent out personal items like a bike or a power tool. And in this case, I see no reason that you couldn’t use the standard mileage deduction to calculate your expenses for the use of the vehicle. (Although one caveat…if the user fills the gas tank for you, then you’d technically need to include the cost of the fill-up in your income too, because deducting standard mileage means you’ve already deducted the value of the gas they used.) As with other rentals of personal property, if you do this on a regular, on-going basis, then you might be deemed “in business” doing this; i.e. you’re treated as a rental car company for tax purposes.