A recent report finds entrepreneurs in the sharing economy are not always receiving the forms needed to complete their taxes properly. Misunderstandings are also common when it comes to self employment taxes and tax deductions.
More than 2.5 million people work (generally part-time) through services like Airbnb, Uber, Etsy and TaskRabbit to supplement their income. Most workers put in less than 10 hours a week in the so-called "sharing economy." Leaving this income off a tax return and failing to set aside a portion to pay taxes can easily lead to an IRS tax audit with significant back taxes along with penalties and interest.
Study finds majority receive no tax guidance
The Kogod Tax Policy Center at American University surveyed small business owners working in the on-demand economy. Almost 70 percent didn't receive any tax planning guidance from their sharing platform company. About 60 percent never received a 1099-MISC or 1099-K stating their earnings.
Almost half of the respondents didn't know which expenses could be deducted against their income. Without proper documentation it can later be impossible to claim tax deductions that would lower a tax obligation.
With this background, you are in good company if you do not understand the tax consequences of earning additional money through the sharing platforms. Learning the rules can avoid a tax surprise and notice of deficiency letter from the IRS.
Here are some of the things that you need to know about income reporting requirements.
1099-MISC and 1099-K gap
Nina Olson, The National Taxpayer Advocate has asked for more guidance from the IRS. The current rules can be difficult to understand. If you make more than $600 in a year from a side-line gig, you should probably receive a 1099.
A 1099-MISC is used to report miscellaneous income received or paid in course of a trade or business. If you received $2,000 from Airbnb for renting a guest bedroom over the year, you'd likely receive a 1099-MISC with the amount you received listed in box 1. But certain credit card payment or paypal payments might need to be reported on a 1099-K.
Form 1099-K has its own reporting thresholds:
- $200 per transaction
- $20,000 income
These thresholds lead to some confusion. An small business owner selling jewelry through Etsy may make $8,000 through 80 different transactions would not likely receive either form.
Each situation is different, but earning an additional $15,000 on top of a full-time salary has tax consequences. When nothing is withheld it could result in a large unplanned tax bill.
When you receive correspondence from the IRS about a tax deficiency, consult a tax attorney. Often there are options available to resolve the matter that will not break your family finances.