The following article was written by The Editorial Staff at TheTaxBook and contributed for use on the TaxSlayer Pro blog.
If one of your clients uses one of the many online platforms available to rent a spare bedroom, provide car rides, or to connect and provide several other goods or services, he or she is involved in what is sometimes called the sharing economy.
An emerging area of activity in the past few years, the sharing economy has changed how people commute, travel, rent vacation accommodations and perform many other activities.
The sharing economy (also called gig economy or access economy) matches workers’ services or goods with customers via apps or websites. This includes businesses that proved access to:
- Ridesharing services
- Delivery services
- Crafts and handmade item marketplaces
- On-demand labor and repair services
- Property and space rentals
Note: This list does not include all types of digital platforms.
Clients who use online platforms to rent their home or provide car rides are subject to taxation on income from those activities, and it is usually reported differently than a salaried employee income (Form W-2).
If a client receives income from a sharing economy activity, it is generally taxable even if they do not receive a Form 1099-NEC, Nonemployee Compensation, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage, and Tax Statement, or some other income statement. This is true even if the client does it as a side job or a part-time business and even if the client is paid in cash. On the other hand, depending upon the circumstances, some or all of the client’s business expenses may be deductible, subject to the normal tax limitations and rules.
As a tax preparer, you may see a significant amount of clients with this kind of income because it can be confusing to file without professional help, especially if it is their first year in the sharing economy. It is important to familiarize yourself with the following terms and forms mentioned above so you can file this type of taxes quickly and efficiently. As always, TaxSlayer Pro is prepared to guide you.
Helpful terms to know as a tax preparer
Access economy refers to a system that enables individuals to pay for access to the benefits of goods over the ownership of those goods. For example, media subscription services such as Netflix or Spotify provide access to movies or music without requiring the user to purchase physical CDs or DVDs.
Crowdsourcing is the practice of obtaining goods and services (including ideas or financing) or other input into a project by turning to many people, typically via social media or the internet.
A gig economy is a labor market system in which individuals offer their services for part-time or short-term engagements. Temporary positions are common as opposed to permanent jobs. Gig is a slang term for a short-term job typically associated with musicians.
A marketplace company is a platform that connects buyers and sellers of a specific product or service intending to direct existing market demand to new sources of supply. The company acts only as a mediator and does not own the product or service provided. For example, Airbnb connects travelers with owners of homes or rooms for rent.
In the more specific definition of a sharing economy, individuals and groups can use underutilized assets they own, such as parking spaces, vehicles, or empty bedrooms, by renting them to those in need of such assets.
Filing requirements for clients in the sharing economy
If a client participates in the sharing economy and receives a payment during the calendar year as a self-employed individual, an employee, or a small business, they may be required to file a tax return to report that income to the IRS. This includes payment received in the form of money, goods, property, or services.
Even if a client does not receive a Form 1099-K or Form 1099-NEC, they must still report any income received through the sharing economy.
Report all income and expenses associated with the business on Schedule C (Form 1040), Profit or Loss from Business. If there is a net profit of $400 or more, the client must also pay self-employment tax. Self-employment tax is a separate tax from income tax.
Real estate rentals
Generally, rental income from real estate is reported on Schedule E (Form 1040), Supplemental Income and Loss, and is not subject to self-employment tax. However, if substantial services are provided, income is reported on Schedule C (Form 1040) and is subject to SE tax.
Substantial services are those services performed for the tenant’s convenience, including (but not limited to) regular cleaning, changing linen, maid service, guest tours and excursions, meals and entertainment, transportation, etc. Substantial services do not include providing heat and light, internet service, cleaning common areas, trash collection, etc.
Note: Some Airbnb rentals that provide extra services could be considered substantial services, and the income could then be subject to SE tax. For example, if a client rents a room in his or her home and provides breakfast or other meals for the tenant, the client may be providing substantial services.
Personal property rentals
If an individual is in the business of renting personal property, report income and expenses on Schedule C (Form 1040) rather than Schedule E (Form 1040) unless the personal property is leased with real estate. Personal property includes property such as equipment, bicycles, or vehicles.
Renting personal property is a business if the primary purpose for renting the property is income or profit, and the client is involved in the rental activity with continuity and regularity. If the personal property rental is not a business, report income as “Other income” on Form 1040. If the personal property rental is for profit, report expenses as write-in adjustments on Form 1040, identified as “PPR.”