Pay-As-You-Go Taxes on Sharing-Economy Activities
posted Jul 11, 2019 by Mike Garcia, CPA in the Global Tax Blog
The sharing economy can be a great way to make money, part- or full-time. Under this business model, technology enables people who own assets or offer services to “share” them with others on demand. Like any type of business transaction, however, there are important tax implications for sharing goods or services — even if it’s just a side job that you receive cash for.
In general, you must report all income from these activities on your tax return. Examples include renting a spare room in your home, driving for a ride-sharing company or offering cleaning services on the weekends.
An exception is permitted if you rent your personal residence for fewer than 15 days. In this case, you don’t have to report any of the rental income, but you also can’t deduct any expenses as rental expenses.
The bright side of the sharing economy is that you can deduct “ordinary and necessary” business expenses related to your activities. For example, major expenses for an Uber driver might include vehicle depreciation, as well as operating costs, such as gas, oil, insurance, car washes and repairs.
Likewise, a freelance graphic designer might claim the costs of supplies, travel expenses to and from freelance assignments, and the costs of electronic devices — such as tablets and smartphones — based on the percentage of business use.
Under the Tax Cuts and Jobs Act, sharing-economy workers also may qualify for the new deduction of up to 20% on qualified business income (QBI) for 2018 through 2025. Numerous limits and restrictions apply, but they don’t kick in until your QBI exceeds the following levels for 2019:
- $321,400 for married individuals filing joint returns,
- $160,725 for married individuals filing separate returns, and
- $160,700 for single individuals and heads of household.
For 2018, the inflation-adjusted thresholds were $315,000 for married people who filed joint returns and $157,500 for other taxpayers.
Withholding for Taxes
Some sharing-economy workers are considered employees who receive a W-2 and are subject to withholding like any other employee. But most sharing-economy participants are considered independent contractors or set up as small business owners — and they’re required to make estimated payments on a quarterly basis.
Contractors who participate in the sharing economy only part-time and work elsewhere as an employee have a simplified alternative to consider. Instead of making estimated tax payments on a quarterly basis, they can increase withholding from their regular jobs to make up for the extra income tax obligation.
Self-employed workers who don’t withhold enough to cover their income and self-employment taxes from sharing-economy activities will owe penalties and interest on the amount that they’ve underwithheld. Self-employed individuals pay the full amount of Social Security and Medicare taxes themselves; there’s no external employer to share the burden.
If you have questions about reporting income or claiming expenses from sharing-economy activities, contact our tax team. We can help you minimize taxes and cover taxes due with reliable quarterly estimates and increased withholding, depending on your circumstances.