The sharing economy includes activities such as car sharing, vacation property rentals, apartment rentals, freelance work, and crowdfunding. Taxpayers may be unaware that there are tax implications related to these activities (even if the taxpayer did not receive any tax information from the sharing economy platform they used to earn their income).
If you receive income from a sharing economy activity, it is generally taxable—even if the activity is a sideline and even if you are paid in cash and do not receive a Form 1099-MISC (Miscellaneous Income), 1099-K (Payment Card and Third Party Network Transactions), W-2 (Wage and Tax Statement), or other information return that reports income to you and to the IRS. Those with positive taxable income from sharing economy activities may also face state and local income taxes. Some or all of your sharing economy-related expenses may be deductible as business expenses.
Special tax rules apply if you rent a property that you also use as a residence during the year. Rental income must usually be reported in full. Most expenses must be divided between personal and rental usage, and deduction limits may apply. Also, those who rent out their properties may owe state and local occupancy taxes, room taxes, or hotel taxes.
If you have net taxable profits from the sharing economy, you may need to make quarterly estimated tax payments to cover the additional taxable income and related self-employment tax.
Those who participate in the sharing economy and fail to meet their federal tax filing and payment obligations could be exposed to penalties, such as the penalty for failure to make adequate estimated tax payments, the late payment penalty, the failure-to-file penalty, and accuracy-related penalties.
When a sharing economy activity becomes significant, you may want to establish a liability-limiting entity to operate the activity. Different entities have different tax implications.