Sharing economy and smart consumption concept. Vector illustration in flat style. People save money, share resourcesAre You Part of the Sharing Economy? What You Need to Know About Taxes

Have you moved into the sharing economy either part-time or in place of a traditional nine-to-five job? Here’s what you need to know to be ready for tax season.

Reporting Your Income

You must report all your income regardless of whether you receive a W-2, 1099 or other tax form. When you offer products or services in the sharing economy, it is generally considered self-employment income.

The minimum filing threshold for self-employment income is net self-employment earnings (after expenses) of $400 or more. This is true even if you didn’t meet the $600 threshold to receive a 1099-MISC or the $20,000 plus 200 transactions threshold to receive a 1099-K.

Filing Your Return

When you file your tax return, you will need to complete Schedule C (Form 1040), Profit or Loss From Business. There are separate lines for your 1099 income and non-reported income. This is also where you enter your business expenses.

If your adjusted gross income is $62,000 or less, you may be eligible for the IRS Free File program. Note that this is your income after your self-employment expenses and other adjustments are deducted, so it is possible to qualify for Free File even if you received more than $62,000 in payments.

Some providers charge additional fees to complete Schedule Cs, state income tax returns or other forms, while others do not. Be sure to compare multiple providers to avoid unnecessary fees.

Estimated Taxes

Because there is no tax withholding on self-employment income, you must make quarterly estimated tax payments. To avoid a fine for failure to pay estimated taxes and interest charges, your estimated taxes should total at least:

  • 90 percent of your current year tax liability, or
  • 100 percent of your previous year tax liability (your total tax amount, not the amount of the check you wrote when you filed your return).
Review Form 1040-ES for special rules that apply to farmers, fisherman and high-income individuals.

Four equal payments are due as follows:

  • April 15 of the year you earned the money (i.e., the year before you file your return).
  • June 15.
  • September 15.
  • January 15 of the year your tax return is due — you can skip this payment if you file your return and pay your full balance by January 31.
If you or your spouse have wage earnings, you can also elect to increase your withholding to cover your required estimated tax payments.

Self-Employment Taxes

In addition to income taxes, you also must pay the Social Security and Medicare taxes that are typically withheld from W-2 wages. This leads to an additional 15.3 percent tax on your net self-employment income.

You compute this tax when you fill out your Schedule C. The employer’s portion, roughly half the tax, is deducted from your adjusted gross income and is not included when calculating your income tax.

Deductions

You can generally deduct all your business expenses in full. Unlike with employment-related expenses, you don’t need to itemize to deduct business expenses. Instead, business expense deductions are entered on Schedule C.

Business expenses directly reduce your self-employment income, so you do not pay self-employment or income taxes on revenue that you used to pay expenses. If your business expenses exceeded your self-employment income, you may be eligible to claim a loss on your tax return.

Common business expenses include the following:

  • Home office
  • Software
  • Tools
  • Raw materials
  • Travel expenses
  • Phone or internet service
Carefully research any expense you intend to claim. The IRS more frequently audits returns with self-employment income due to high rates of claims for improper expenses. The most common mistakes are deducting personal expenses or claiming a full deduction for an expense that is part personal and part business (e.g., a phone bill).

You can learn more by visiting the IRS’s new Sharing Economy Tax Center.

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