Uncle Sam is waiting for his cut from American taxpayers, including those who participate in the so-called sharing economy – doing side gigs like renting out their apartments, driving for Uber or running random errands for strangers on TaskRabbit.com.
According to a recent data, Intuit Inc, the owner of the TurboTax tax-preparation software, estimates that 3.2 million Americans are already part of the sharing economy, with the number expected to grow to 7.6 million by 2020.
The key to what a person owes is in a 1099-K tax statement which details their earnings. It then sets off a cascade of other tax forms, like the Schedule C, which taxpayers use to offset the income with allowable expenses.
But many newcomers to the sharing – or gig – economy, do not pay close attention throughout the year to what they are spending to make money, and end up scrambling when tax time comes around.
For instance, Cara Brostrom, a 34-year-old photographer in Boston, remembers buying sheets from Ikea for the days she rented out her house on Airbnb.com, but she does not know where the receipts might be.
And that 1099-K tax statement she recently received?
“It’s unread in my inbox,” Brostrom says.
But taxes are not an if, but a when and how much, notes Jim Breese, an Airbnb veteran host and co-founder of an information site on the process.
The following are three tips to help taxpayers avoid unexpected tax bills (or worse) from their sharing economy income:
1. Get help
Brostrom has two things going for her and her head-in-the-sand approach, the most important being that she already has a relationship with a professional tax preparer and will hand off her paperwork in the next month.
File your taxes with a professional the first year, and then you might be able to file yourself the next year if you follow the template, suggests Breese.
An important rule that Brostrom did not know about, for example, is that the IRS allows homeowners to rent out their homes for up to 14 days without having to pay tax on the income. Since she only had six nights of rentals this year, she is in the clear.
But Brostrom is in the minority of sharing economy workers.
Breese says a recent survey he conducted found than less than 10 percent of Airbnb hosts rent properties for less than 14 days per year. Most of Davis’ clients make more than $20,000 a year from property rentals.
Anyone who made income in the sharing economy is expected to make quarterly payments prior to the April tax deadline or face fees and penalties. Airbnb says it regularly communicates with hosts, and has partnerships with H&R Block and Ernst & Young.
One benefit to hiring a professional, Breese notes, is help in planning for the following year, so you do not fall behind a second time.
2. Get a system for paperwork
While the method of dumping everything into a shoebox and tackling it once a year still works fine, now there is a litany of apps to help you throughout the year.
For those with more complicated business expenses, Intuit’s Quickbooks Self-Employed might be worth $4.99 per month.
3. Set aside money to pay
Carr’s group caters to young people looking to make better sense of their finances, and she says they have seen an influx of people coming in telling tax horror stories.
“They open up an Etsy shop and thought they were doing something fun. Then they got huge tax bill they weren’t expecting,” Carr says. “We see a lot of people who have gotten a rude awakening in the first year and then clean it up.”
One way to prevent this is to set aside 15% in a separate bank account to cover taxes, and pay all his expenses out of that account. This is what Breese does for his Airbnb rental in Los Angeles, where he invests in a property near the convention center.
“If you’re buying groceries and have Airbnb supplies, separate them and pay separately,” he says. His other pro tip: get a receipt book at an office supply store to keep track of cash payments, like to a housecleaner or repairman.