While many would argue we should stop "sharing" so much of our personal lives (who really cares what you ate for lunch?), there is no stopping the sharing economy.
Today, around 45 million Americans offer goods and services in the sharing economy that are used by 86.5 million Americans, according to a survey conducted by Burson-Marsteller, a division of the Young & Rubicam Group.
And more than half of the people involved are doing it to supplement their current income, says Lisa Greene-Lewis CPA, communications manager & tax expert at Intuit, which has also conducted surveys on the topic.
This sharing economy could very well be the future of our current market system, so this trend is not going away.
Nor are the tax implications. Let's share a little knowledge to help you navigate the tax consequences of your involvement in the sharing economy.
Congratulations! You're Self-employed!
While the freedom of being self-employed and having your own business is amazing, you now have corresponding tax issues.
You owe tax.
You will owe taxes - that includes federal, state and self-employment taxes -- on all your income.
Now, don't get your 1040 in a twist just yet. The good news is you can offset that taxable income with all the corresponding expenses you incur to get the job done (which we'll talk about in a minute).
Keep Good Records
It is imperative that you keep track of everything you spend to work.
So find a folder or shoe box, or create an Excel spreadsheet and start keeping track. Save every receipt.
Doing it now as it happens is so much better than trying recreate your expenses if you are ever audited, says Jackie Perlman, principal tax research analyst at H&R Block.
Make Estimated Tax Payments
You now may have to make estimated tax payments - especially if you expect to make more than $1,000 in the tax year, says Greene-Lewis.
If you don't make estimates throughout the year, you risk getting hit with an underpayment penalty, and why give Uncle Sam any more of your hard-earned money?
So try to pay something before the end of the year. The payments are technically due on April 15, June 15, September 15 and January 15, 2017 but make them whenever you can.
More Freedom, More Forms
If you perform a service - let's say you drive for Uber or Lyft, or you do chores for TaskRabbit, you will report the income you earned on Schedule C. You should receive a Form 1099, next January, which will show the amount.
But even if you don't, report your income on Schedule C.
And here's where your expenses come in. So if you are an Uber driver, the cost of gas to drive, the water bottles you provide for customers and a portion of the maintenance on your car are all qualified expenses, says Greene-Lewis. (Click here for more expense details.) But your expenses are subtracted from your income. And the tax is applied to that final number. So the smaller that number, the less tax you owe.
Airbnb or other rentals
If you rented out your home or extra garage space, then you ostensibly are a landlord and will need to file Schedule E. In this instance, you get to deduct a portion of your property taxes, mortgage interest, utilities repairs etc. (IRS Publication 527 - Residential Rental Property is a great resource.)
Etsy, Amazon Marketplace
If you're paid through a third-party network, like PayPal, your earnings will be reported on a Form 1099-K -- Payment Card and Third Party Network Transactions.
So don't be surprised if this lands in your mailbox next year. It still needs to be reported on Schedule C.
Big note on all 1099s
Just because you don't get a 1099 next January, don't think you're free and clear. The IRS gets a copy from the organization you worked for, reminds Mark Luscombe, principal analyst at Wolters Kluwer, a tax and accounting services company. So they will know about your income.
Lower Your Tax Bill
If you are totally caught off guard by all this, don't panic. There are still things you can do to get your tax bill down. For instance:
- If you need new equipment (i.e. a laptop), buy it before the end of the year, and you can expense it outright if it's under $2,500.
- If you have a day job, increase your W-2 withholdings between now and the end of the year, says Luscombe.
- Max out your retirement account or fund a new one.
Software programs, like TurboTax and TaxCut, really hold your hand through this process. Otherwise make sure you have a tax preparer you like and trust, because you will need to share a lot of information.
But, please, there's no need to tweet about it.