You’re not the first person this has happened to: you posted your spare bedroom on Airbnb to make a little extra income, you indulged your passion for food by cooking on Feastly, or you earned some extra cash on your commute by picking up rides on Lyft, and you found yourself with a 1099 at the end of January reporting your “Miscellaneous Income.” While you might have thought you were making a little extra money on the side, in the eyes of the IRS you were operating as sole proprietor of a business, and the income from your “sharing economy businesses” will impact your tax return this year.
As this is your first time filing 1099 income, Shared Economy CPA, who specialize in the sharing economy, have provided the tips below to help you navigate reporting your new business income:
1: Schedule C
Schedule C is the “schedule used to report income or loss from a business you operated or a profession you practiced as a sole proprietor.” (IRS) If you’ve never earned income outside a traditional employment situation, this will likely be the first time you use Schedule C on your tax return. Schedule C is attached to your Form 1040.
2: Get your 1099s together.
Each company you earned money through (e.g. Airbnb, Uber, TaskRabbit) will send you a 1099 to report your income (and they’ll also send a copy to the IRS.) You’ll need to report all the income on your 1099s on Schedule C, so you’ll need to have a 1099 from each company you earned through before you’re ready to your finish Schedule C. You should receive your 1099s by January 31, so if you haven’t received them yet, you should soon. You’ll want to make sure your 1099s reconcile with the income deposited into your bank accounts by each company, and that the income on Form 1099 matches with the 1099 income on Schedule C Part 1.
3: Deduct your Fees and Commissions
One of the most common mistakes sharing economy earners make on their taxes is not deducting the fees and commissions charged by the sharing economy companies from their income. All sites include a charge to you for using their website to “run your business”, usually called a commission or a service fee. Your 1099 will usually include this fee in the total income, rather than deducting it from the total. This fee is an “ordinary and necessary” expense to running your business, so make sure you claim this cost to you as a deduction.
4: Document your expenses.
You have to spend money to make money! You likely had to purchase new linens for your home rental, have your car washed for Lyft, have a cellphone plan with data for Instacart or buy ingredients for your Feastly menu. Any costs that are both “ordinary and necessary” for the activity you were earning from, are tax deductible. Make sure you have documentation for your expenses, and list them for your records. If you purchased something that you used for both personal and business activities, calculate the percentage it was used for personal activities, and the percentage it was used for business activities, and document your calculation clearly. Be as detailed as possible, for your reference in the future or for your accountant if you choose to use one. Report all of your business expenses on Schedule C Part II.
5: File your tax return by April 15
Once you’ve finished Schedule C, you can finish up the remainder of your Form 1040 (your Individual Income Tax Return) with W-2 income, if you have any, and personal expenses.
If you did not make quarterly tax payments or adjust your W-2 withholding status to account for your additional income, you might be surprised with a tax bill that is higher than you expected. To avoid this in the future, make estimated payments throughout the year to reduce the shock of an annual tax bill and make next April a little more pleasant.
If you don’t think you’ll be able to gather all of your documents and file your tax returns by April 15, request an automatic tax extension to give yourself an extra six months to file. However, this doesn’t mean you have an extra six months to pay your taxes, so you will need to reasonably estimate your tax owed using the information you have available and make your payment by April 15th. If you don’t have enough funds to cover your tax owed, you will need to pay interest on your unpaid taxes, so pay what you can to limit your interest cost.
If you rented your home or used your personal vehicle for your business activity (e.g. Airbnb, VRBO, Uber, Lyft, Instacart), make sure you read Shared Economy CPA’s tax tips as there are deductions and rules that relate specifically for those activities.
We have provided these tips to you for informational purposes only. Everyone’s tax situation is different, so please contact a tax professional if you have questions specific to your personal situation. If you are planning on hiring an accountant to help you, make sure you choose someone familiar with the sharing economy to make sure you are making the most of your allowable deductions. You can find some options in our Support Marketplace.