Author: Leon Clinton

Tax

The Sharing Economy and your Taxes

Uber, Lyft, Airbnb, Etsy, Rover, TaskRabbit. If you’ve used any of these services–or provided services for them to others–you’re a member of the sharing economy.

If you’ve only used these services (and not provided them), then there’s no need to worry about the tax implications but if you’ve rented out a spare room in your house through a company like Uber or Airbnb then you’re probably collecting a fee–a portion of which goes to the provider (in this example, Airbnb) and a portion that you keep for providing the service. But whether it’s your full-time gig or a part-time job to make some extra cash, you need to be aware of the tax consequences.

Millennials are the number one users of the sharing economy but Gen X and Boomers use it too; and a recent PWC study found that 24 percent of boomers, age 55 and older, are also providers. While many people are looking to earn a bit of extra income, some dive into it full-time hoping they can make a living, and still, others simply enjoy meeting new people or providing a service that helps people. What most people don’t realize is that this extra cash could impact their taxable income–especially if they have a full-time job with an employer.

In other words, that extra income might turn into a tax liability once you figure out your tax bill. To avoid surprises at tax time, it’s more important than ever to be proactive in understanding the tax implications of your new sharing economy gig and seek the advice of a competent tax professional.

Tip: If you have a job with an employer make sure your withholding reflects any extra income derived from your side gig (e.g. boarding pets at your home through Rover or driving for a ride-share company like Uber on weekends). Use Form W-4, Employee’s Withholding Allowance Certificate, to make any adjustments and submit it to your employer who will use it to figure the amount of federal income tax to be withheld from pay.

New Business Owner

While you may not necessarily think of yourself as a newly self-employed business owner, the IRS does. So, even though you work through a company like Airbnb or Rover, you are considered a business owner and are responsible for your own taxes (including paying estimated taxes if you need to). It’s up to you to keep track of income and expenses–and of course, to keep good records that substantiate your income and expenses (more on this below).

Note:If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement.

And now, for the good news. As a business owner, you are entitled to certain deductions (subject to special rules and limits) that you cannot take as an employee. Deductions reduce the amount of rental income that is subject to tax. You might also be able to deduct expenses directly related to enhancements made exclusively for the comfort of your guests. For instance, if you rent out a room in your apartment through Airbnb, amounts you spend on window treatments, linens, or even a bed, could be deductible.

Pitfalls: It’s more complicated than it seems

At first glance renting out a spare room through Airbnb or pet sitting through Rover seems like an easy thing to do, but as with most things, it’s more complicated than it seems and you’ll need to keep an eye out for the following pitfalls:

    • Insurance requirements
    • Business license registration (state or municipal)
    • Room and lodging, or tourist taxes

Many municipalities charge room, occupancy, or tourist taxes on the amount of rental paid for short term stays (less than 30 days). Noncompliance may result in penalties, fees, and payment of back taxes owed.

    • Failure to set aside money for taxes and/or estimated tax payments

Estimated tax payments apply toward both income tax and self-employment tax (Social Security and Medicare). If you don’t pay enough tax, through either withholding or estimated tax (or a combination of both) you may have to pay a penalty. Estimated tax payments are due quarterly. The payment of estimated tax for the income for the first quarter of the calendar year (that is, January through March) is due on April 15. Payments for subsequent quarters are due on June 15, September 15 and January 15. If you don’t pay enough by these dates you may be charged a penalty even if you’re due a refund when you file your tax return.

Tip: If you also work as an employee, you can often avoid needing to make estimated tax payments by having more tax withheld from your paycheck.

    • Not receiving Forms 1099-MISC or 1099-K from a company you provide services for

As a sole proprietor, you may receive a Form 1099-MISC (employees receive a Form W-2) or a 1099-K. Form 1099-K, Payment Card and Third Party Network Transactions, is an information return that reports the gross amount of reportable payment card and third party network transactions for the calendar year to you and the IRS. If you receive a Form 1099-K, you should retain it and use the information reported on the Form 1099-K in conjunction with your other tax records to determine your correct tax.

    • Renting out a home for more than two weeks

If you rent your home out for 15 days or more during a calendar year and you receive rental income for the use of a house or an apartment, including a vacation home, that rental income must be reported on your return in most cases. You may deduct certain expenses such as mortgage interest, real estate taxes, maintenance, utilities, and insurance and depreciation, that reduce the amount of rental income that is subject to tax.

If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won’t be able to deduct your rental expense in excess of the gross rental income limitation.

Tip: Generally, if you rent out your home for less than 15 days, then you do not need to report any of the rental income and you don’t deduct any expenses as rental expenses.

Recordkeeping

It’s important to keep good records and to choose a recordkeeping system suited to your business that clearly shows your income and expenses. The type of records you need to keep for federal tax purposes depends on what kind of business you operate; however, at a minimum, your recordkeeping system should include a summary of your business transactions (i.e. income and expenses) using a cash basis of accounting. Your records must also show your gross income, as well as your deductions and credits.

Tax Rules are Complicated: Don’t get Caught Short

If you have any questions or would like more information about the sharing economy and your taxes, please contact the office.

Tax

Tax Due Dates for September 2017

September 11

Employees Who Work for Tips – If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.

September 15

Individuals – Make a payment of your 2017 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2017.

Partnerships – File a 2016 calendar year income tax return (Form 1065). This due date applies only if you were given an additional 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.

S corporations – File a 2016 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.

Electing Large Partnerships – File a 2016 calendar year income tax return (Form 1065-B) and pay any tax due. This due date applies only if you timely requested an automatic 6-month extension. Otherwise, see March 15. Provide each partner with a copy of Schedule K-1 (Form 1065-B) or a substitute Schedule K-1.

Corporations – Deposit the third installment of estimated income tax for 2017. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.

Quickbooks

Working with Checks in QuickBooks

“I don’t write checks anymore.” You hear a lot of people say that these days, and for many consumers, debit cards, smartphone payment apps, and online banking have all replaced the old paper checkbook.

That’s fine if you’re at Starbucks or the grocery store, but many small businesses still prefer to issue paper checks to pay bills, cover expenses, and make product and service purchases. QuickBooks provides tools that help you create, print, and track checks.

But you don’t just head to the Write Checks window every time something needs to be paid. There are numerous times when you would record a payment in a different area of the program. For example, if you’ve already created a bill in Enter Bills, you’d go to the Pay Billsscreen to dispatch a check.


Figure 1: Once you’ve recorded a bill in Enter Bills, you need to visit the Pay Bills screen to dispatch a check. The image above shows the bottom of that screen.

Other examples here include:

  • Issuing paychecks (click the Pay Employees icon),
  • Submitting payroll taxes and liabilities (Pay Liabilities icon), and
  • Paying sales taxes (Manage sales tax icon).

Simple Steps

Let’s say you asked an employee to go to an office supply store to pick up some copy paper because you ran short before your normal shipment came in. If you knew the exact amount it would cost, you could write a check directly to the shop. But the employee agrees to pay for it and be reimbursed.

Click the Write Checks icon on the home page. If the BANK ACCOUNT that’s showing isn’t the correct one, click the arrow to the right of that field and select the right one. Unless you’ve written a check to that employee before, he won’t be in the Vendor list that opens when you click the arrow to the right of PAY TO THE ORDER OF. Enter his name in that field.

The Name Not Found window opens. If this was a new vendor that you would be working with again, you’d click Set Up and follow the instructions in the step-by-step wizard that opened. Since this isn’t the case, click Quick Add. In the window that opens, click the button next to Vendor.

Note: If you’re using a payroll application, you already have an employee record for that individual, which would have filled in automatically when you started typing the name. Since this is a Non-Payroll Transaction, it won’t get mixed up with his payroll records as long as you assign the correct account.


Figure 2: If you don’t want to create an entire record for the payee of a check, you can just click Quick Add.

QuickBooks will then return you to the check-writing screen, where you can verify the check number and date, and enter the amount. Fill in the MEMO field so you’ll remember the reason for the payment.

At the bottom of the screen, you’ll see a tabbed register. The Expensestab should be highlighted and the amount of your check entered. Click the down arrow in the field under ACCOUNT to open the list, and select Office Supplies. The AMOUNT should fill in automatically. Not sure which account to select, and what the remaining three columns mean? Please call the office for assistance.

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Note: You would only enter the expense under the Items tab if you were buying inventory items or paying job-related costs.


Figure 3: Warning: If you’re planning to print the check, be sure to check the Print Later box in the horizontal toolbar at the top of the screen.

When you’re finished, save the transaction. Since you want to pay the employee right away, click the Print Checks icon and click in the field in front of the correct check to select it, then click OK.

Easy, But Tricky

QuickBooks makes the mechanics of writing checks easy. Simple as it is, though, a lot can go wrong if you, for example:

  • Issue a check from the wrong screen,
  • Classify a check incorrectly, or,
  • Skip a step.

If you’re new to check-writing in QuickBooks or are confused about any of its attributes, don’t hesitate to contact the office to set up a learning session with one of our QuickBooks professionals.

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