Sunday, February 23, 2014

If you make money in the sharing economy, the IRS will know

Kathleen Pender for SF Gate writes: Renting a spare room to backpackers or slapping a mustache on your car and transporting bar-hoppers seems like an easy way to make money - until tax season rolls around.

Some people who participate in the sharing economy find this out the hard way, when they get an unfamiliar 1099 form and realize they have to file new schedules with their tax return and pay a cut to Uncle Sam.
The sharing economy - also called collaborative consumption - lets individuals sell, rent or barter a product, space or service using apps or a website. Standing between them and their customers is a company that typically provides payment processing, marketing, a rating or review system and in some cases, liability insurance.
The nascent industry includes Bay Area companies such as Airbnb (home, room or couch rentals); Uber and Lyft (ride-sharing); TaskRabbit and Gigwalk (errand and odds jobs); and Prosper and Lending Club (peer-to-peer lending).
People who make money using these platforms generally do not have taxes withheld from their payments. Depending on how much they earn, they might or might not get a Form 1099 showing their receipts. This form also goes to the IRS. Even if they don't get a 1099, they are supposed to report all income on their tax return, unless it is specifically exempted.
"For the most part, people are ignorant that they even have to pay taxes" on money earned through the sharing economy, says Alberto Escarlate, a partner with theCollaborative Fund, which backs such companies.

Seeking guidance

His firm was getting so many questions about sharing-economy taxes it started a website - 1099.is - to answer some.
The answers are sometimes confusing. Not all companies - even direct competitors - report payments the same way. And because the industry is so new, even accountants are sometimes stumped.
"The tax side was a real pain in the butt," says Alex Stack, who loaned money through Prosper in its early days. "For years I could do (taxes) myself with a 1040EZ. Then I had to get an accountant. Even he couldn't figure out what they were doing."
People who lend money through Prosper are actually purchasing securities that give them the right to principal and interest on a loan or piece of a loan.

Annual statements

After the end of each year, they get a package that might include a 1099-OID (for interest on notes), 1099-B (for notes that were charged off and recoveries of previously charged-off notes) and 1099-MISC (for late fees, bonuses and referral awards).
They also get an annual statement, which is not sent to the IRS, that details their account activity. "That statement could be 50 pages if they bought a whole bunch of loans," saysAaron Vermut, president of Prosper.
Lending Club sends a similar package to investors, but unlike Prosper, it does not include charge-offs on Form 1099-B.
Vermut says taxes have not been a problem for most Prosper investors. "This is an early adopter product, up to now they have been relatively sophisticated," he says.
If you rent out your personal residence for 14 days or less, you do not have to report the income. If you rent it out for more, get ready for some paperwork.
Airbnb issues Form 1099-K to people - called hosts - who rent out homes using its platform.
This form is only a few years old; it was created to unearth income that was not being reported to the IRS.

3rd-party networks

Individuals, businesses and other entities receive a 1099-K because they have either:
-- Received payments via debit or credit card for any amount, or
-- Received payments through a third-party network for more than 200 transactions that totaled more than $20,000 in a year.
"A third-party network is an intermediary that facilitates cash flows between private or commercial parties doing business," says Jerri Langer of the Cokala Tax Group.
PayPal is an example of a third-party network.
Airbnb says it is acting as a "merchant acquirer," not a third-party network and sends 1099-Ks to all hosts - no matter how much or little they have earned - because the threshold for reporting credit card payments is zero.
Most accountants say hosts should report this as rental income on Schedule E, rather than on Schedule C, which is used for business income.
"You could make a case for putting a traditional bed and breakfast on Schedule C," says J. Aaron Christopher, a CPA in Concord. But if you are renting through Airbnb, whether it's "a room, a part of a room or a whole house, the primary activity is Schedule E because it is a residential property."
TurboTax treats it as rental income on Schedule E, a spokeswoman for Intuit says.
Hosts can deduct expenses related to their rental, including Airbnb fees, which are not subtracted from the amount reported on Form 1099-K.
For more information on renting residential or vacation property, seewww.irs.gov/taxtopics/tc415.html.

Ride sharing

Lyft, which connects people using their own cars with passengers, treats drivers as independent contractors. Drivers who give at least 200 rides and earn at least $20,000 from passengers in a year get Form 1099-K. Drivers who earn at least $600 from bonuses, mentor training and reimbursements get Form 1099-MISC. Drivers who meet neither criteria get no tax form.
Uber, which also operates a ride-sharing platform, reports driver income on 1099-MISC, but "we will be transitioning to 1099-K beginning this year," a spokesman says.
TaskRabbit, which finds people to do odd jobs, also treats its workers as independent contractors.
"Unless you have earned over $20,000 throughout the calendar year you will not be receiving a 1099 from us," TaskRabbit says on its website. "You will however receive an earnings statement that will separate out your earnings into the following categories: task price, reimbursements and tips." It adds: "If you earned over $600 last year and received payment by check, you will receive a 1099 for those payments only."

Schedule C

Gigwalk, which is similar to TaskRabbit, reports payments that exceed $600 a year on Form 1099-MISC, but "we will be transitioning to 1099-K beginning this year," a spokesman says.
Money earned through companies such as Gigwalk, TaskRabbit, Lyft and Uber is usually reported on Schedule C.
Taxpayers can deduct expenses related to this income. The net amount is subject not only to income tax but also to self-employment tax, which covers both the employer's share ofSocial Security and Medicare taxes.
Rental income reported on Schedule E is not subject to self-employment tax.   
- You can Read Kathleen Pender at her Blog: click here   or Kathleen Pender 

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