40% are unaware of their tax responsibilities
- 40% of the workers in the Sharing Economy are unaware of their tax responsibilities.
- Over 60% of the service provider companies are not training their new workers on their tax responsibilities.
Source: Written statement of Nina E. Olson, National Taxpayer Advocate given at the Hearing on “The Sharing Economy” to the Committee on Small Business, U.S. House of Representatives, May 26, 2016.
Tax compliance is a problem for Uber drivers, Airbnb and others deemed to be in the new Sharing Economy. The IRS is aware of this and has launched a “Sharing Economy Tax Center” on their website to help this growing group of workers. Here are ideas to keep you out of this IRS spotlight.
The Sharing Economy
The sharing economy consists of workers that are taking part in the service economy by “sharing” their resources for part-time or full time employment. Some common examples are:
- Cab services: use your car
- Delivery services: use of your car
- Short-term rentals: use of rooms, apartments, and homes
- Home services: use of your personal tools and supplies
Note: While the IRS seems to be focusing on this new “Sharing Economy” really any freelance worker has the same tax challenges as these workers.
Key Tax Responsibilities
If you use your car as a cab or rent out your home for the big golf tournament, you will need to understand the following tax obligations.
Employee or contractor? You need to know which of these defines your employment arrangement. Your personal tax obligations are markedly different under each scenario. As an employee, the service company is responsible for paying the business portion of Social Security and Medicare. They will pay unemployment taxes. They will also withhold your portion of Social Security, Medicare, federal taxes and state taxes and send them in for you. These payments are reported to you on a W-2. This is not the case if you are a contractor.
Social Security and Medicare. All employers are required to pay Social Security and Medicare taxes. As a contractor you will need to reserve 12.4% of your net income for Social Security and 2.9% for Medicare payments.
Estimated taxes. You may need to send in quarterly estimated tax payments to avoid tax penalties when you file your tax return.
Other taxes. You may be subject to other taxes including unemployment taxes.
Depreciation. This area can be confusing. You are able to expense a portion of the cost of capital assets (like your car) if they are used for business purposes. However, if also used for personal use you will need to adjust the amount available for depreciation.
Special tax rules. Other areas of the tax code have special provisions. The most common of these is use of your home for business or rental.
The tax rules for those in the new service economy are complex and confusing. Ask for help before it gets out-of-hand or visit www.irs.gov and search “Sharing Economy Tax Center.”
Contact us for more information.