If you are earning income through entities like Uber, Lyft, Airbnb and others, beware the IRS will be verifying your reported income.
The Sharing Economy
On the internet, everything is for hire. Last night 40,000 people rented accommodation from a service that offers 250,000 rooms in 30,000 cities in 192 countries. They chose their rooms and paid for everything online. But their beds were provided by private individuals, rather than a hotel chain. Hosts and guests were matched up by Airbnb, a firm based in San Francisco. Since its launch in 2008 more than 4,000,000 people have used it—2,500,000 of them in 2012 alone. It is the most prominent example of a huge new “sharing economy”, in which people rent beds, cars, boats and other assets directly from each other, coordinated via the internet.
You might think this is no different from running a bed-and-breakfast, owning a timeshare or participating in a car pool. But technology has reduced transaction costs, making sharing assets cheaper and easier than ever—and therefore possible on a much larger scale. The big change is the availability of more data about people and things, which allows physical assets to be disaggregated and consumed as services. Before the internet, renting a surfboard, a power tool or a parking space from someone else was feasible, but was usually more trouble than it was worth. Now websites such as Airbnb, RelayRides and SnapGoods match up owners and renters; smartphones with GPS let people see where the nearest rentable car is parked; social networks provide a way to check up on people and build trust; and online payment systems handle the billing. I call these websites “sharing economy facilitators”.
As the sharing economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners.
Duty To Report Income
Except as otherwise in the Internal Revenue Code, gross income means all income from whatever source derived (IRC Sec. 61). So whether your work in the sharing economy is you only job or a secondary job, you need to report your income from that work on your income tax return.
Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”. As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings. Uber spells this out, sort of, on their site:
“You pay taxes as an individual—there’s no need to register as a business. File taxes as you normally would, and we’ll send you a 1099 form that you will use to report the income you made driving with Uber.”
You will report your net income from your Uber activitiy, (i.e., what you are paid minus any associated expenses), on Schedule C and the Schedule C “bottom line” will show up on line 12 of your Form 1040. (“Business income or (loss). Attach Schedule C or C-EZ”.)
The net income from your activity with the sharing economy facilitator is subject to Self Employment taxes, (Social Security and Medicare), at a 15.3% rate. Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.
So whether you are using your personal car for business or part of your residence as a “B&B”, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will loose out on a lot of deductions.
Why The IRS Likes The Sharing Economy
Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, sharing economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.
How About Money Collected For Special Projects?
Money collected for special projects via crowd-sourcing sites also is generally viewed by Uncle Sam as taxable income, regardless of whether it’s for a movie or a recipe. There is no tax benefit even to contributions to help out folks in need.
No tax break for donors – Setting up online money-collection sites like GoFundMe to help out folks who’ve encountered a catastrophe is today’s equivalent to the donation jar at the neighborhood grocery. Just that those dollars, since the crowd funding money is given directly to the individuals, not to IRS-approved 501(c)(3) organizations that pass it along, tax laws regarding charitable gifts say that the donors can’t deduct the gifts as itemized tax deductions.
Income to recipients – Now you would think that the money the recipient of the crowd-sourcing account do not have any tax worried as the Internal Revenue Code says that gifts are not taxable income to the recipients. But IRS is treating these funds received as taxable income and after matching the recipient’s tax return to the Form 1099 reported by the company running the crowd-sourcing account the IRS will generate a tax bill where the reported income is understated. It does not matter that the money received was used for the purpose intended when setting up the account. So until the IRS issues any definitive guidance or a Court weighs in on this issue, beware.
Don’t Take The Chance And Lose Everything You Have Worked For.
Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.
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