Sharing economy has become a veritable source for individuals to generate useful additional income nowadays. Many students, working professionals, and self-employed individuals make use of these ever-emerging platforms such as renting out a spare bedroom or a vacation house or taking your car out for a spin every evening by working for app-based cab services such as Uber or Lyft. These serve as an extremely useful secondary income for you.
But, are you aware of the tax implications that accompany the income earned from such sources?
If you are already making the most of the gig or on-demand economy or planning to head into it in the coming future, the following tax tips can help you retain the maximum amount of your earnings and save you from many unforeseen tax liabilities and penalties.
Income earned from sharing economy is taxable
Whether or not you receive the Form 1099-Misc (Miscellaneous Income) or Form 1099-K (Payment Card and Third Party Network Transactions), or Form W-2 (Wages and Tax Statement), the income earned from any of the sharing economy platforms is taxable and needs to be reported to the IRS. The good news here is, you can make the most of your tax returns by deducting all or part of the expenses incurred in providing such services. Contacting your tax expert can help you make informed and timely tax decisions and file your returns smartly.
Probable Tax Deductions to be aware of
1. While renting a room or a vacation home
Part or all of the expenses incurred on renting out your property for sharing economy can be included in your income tax deductions. Expenses like maintenance charges, electricity bill, depreciation, mortgage interest, real estate taxes, casualty losses, insurance, utilities and, for that matter, even an extra set of keys that are used for the rented portion can be added to your income tax deduction by attaching valid bills.
A point to keep in mind is only the expense incurred in sharing economy can be included in the deduction, and no personal bills can be added to this.
2. While renting a car or giving Lyft or Uber Rides
Though your Lyft or Uber app keeps track of all the income you earn while providing those rides and that is enough while you file your taxes? Then you haven’t got the complete picture. These apps do not track parameters such as the consumed fuel, servicing charges, mobile phone bill, tolls, insurance, depreciation, etc., accounts of which can give you great tax breaks. So, keep a personal record of all the bills and expenses incurred while doing business and include them in your tax deductions.
For example — if you use your car for half a year for personal use and the other half as an Uber cab, then the expenses incurred only during the usage as an Uber cab can be included in your tax deduction.
Same ways, the depreciation on your assets can be added as a tax deduction only in proportion with the duration it is used for business in the sharing economy and not on the total period of its existence.
Know all about the estimated tax payments
If you are involved in sharing economy, then keep in mind to pay taxes as per your income, either as a withholding or an estimated payment or a combination of both to the IRS or you could be charged a penalty for not paying enough taxes.
It is possible that you might feel that the amount of withholding from your salary, pension, or other income will cover the tax liability. However, that alone might not be enough. Being conscious of the tax implications on your total income is very important to save yourself from tax penalties. So, if the amount of withholding does not cover for the entire tax implication on your income, then you can make estimated payments throughout the year to the IRS for saving yourself from unnecessary penalties.
Such tax payments can be made quarterly starting from 15th April (For January to March), and on 15th June, 15th September, 15th January for the subsequent quarters.
What are self-employment taxes?
If you are self-employed in a sharing economy, then your tax implications will be different from that of employees. You will need to pay self-employment taxes, which includes Social Security and Medicare taxes with no employer matching for these. Usually, Social Security and Medicare taxes are paid by the employer, which includes the amount which is deducted from the employee’s salary and a matching contribution by the employer.
Form 1099-K: A guide to Payment Card and Third-Party Network Transactions
The Form 1099-K is an information return statement that outlines the annual gross amount of reportable payment card and third-party transactions to you and the IRS. You can use this form to compare and ascertain your exact tax liabilities to take informed tax decisions.
How to be a diligent taxpayer and save most of your hard-earned dollars in sharing economy?
Taking informed tax decisions reduces your income tax liabilities to great lengths and saves you from many unforeseen penalties. With so many of you being involved in sharing economy to increase your income, we are right here to guide and help you make the best tax decisions and make the most of all the tax deductions and exemptions.
For more such tax news and updates, stay tuned with MyTaxFiler. We also provide a one-stop solution for all your tax-related woes. Simply drop a mail at firstname.lastname@example.org or call us at (888)-482–0279 for an on-call consultation.