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Understanding Tax Requirements in the Sharing Economy

Posted on in Taxation Law

sharing economy, tax requirements, self-employment taxes, estimated tax payments, San Jose tax attorneyWith the prevalence of smartphones and personal computers in modern American society, people have more opportunities than ever to earn an extra income. In the sharing economy (also known as the gig economy), money can be made by driving individuals in cars, renting out homes or rooms for short periods, making and selling products, or performing tasks for people.

While there are great benefits from supplementing one’s income in this manner, these individuals may not be aware of how this additional income affects the taxes they pay. Consider the following aspects of tax law of which people in the sharing economy should be aware:

1. Taxable income - All income is generally taxable, whether it is paid by an employer, earned in a “side business,” or received as a cash payment. Since sharing economy companies often treat workers as independent contractors rather than employees, the worker is usually responsible for paying taxes on his or her earnings.

2. Self-employment taxes - Independent contractors are considered to be self-employed, and if they make net earnings of more than $433.13 in a year, they will be required to pay self-employment taxes. The self-employment tax rate on net income earned from self-employment is 15.3 percent, and these payments go toward Medicare and Social Security. Other taxes may also apply.

3. Deductions - Some business expenses may be deducted from gross income, reducing the amount of taxes that are owed. For instance, drivers may deduct the costs of supplies, tolls, or parking fees. However, personal expenses cannot be deducted. Therefore, it is important to only deduct costs associated with doing business. This is especially true under the new Tax Act.

4. Depreciation - In addition to business expenses, deductions can also be taken for the depreciation in the value of business property put in service and used in the business that has a life of more than one year. This can include the capitalized costs of maintenance and repairs for property such as buildings, furniture, equipment, and vehicles. As with business expenses, only depreciation related to business use can be deducted. Drivers can deduct the actual costs of depreciation, or they can use the standard mileage deduction, which, as of 2017, is 53.5 cents per mile.

5. Rental property - Income from renting a home, apartment, or room must be reported if the property was rented for at least 15 days in a year. Subject to limitations, certain expenses can be deducted, including interest on a mortgage, real estate taxes, maintenance, utilities, insurance, and depreciation. However, if the dwelling is also used for personal use, only the expenses related to business use can be deducted.

6. Estimated tax payments - To avoid owing taxes or incurring penalties when filing their annual tax returns, people can make estimated tax payments on a quarterly basis. Taxes for each quarter are due on April 15, June 15, September 15, and January 15. People who work for an employer in addition to being self-employed can avoid the need to make estimated tax payments by modifying their withholding to account for their additional income. This can be done by filling out and submitting a W-4 form to their employer.

Contact a San Jose, CA Tax Lawyer

If you have any questions about paying taxes while self-employed or working as an independent contractor, John D. Teter Law Offices can work with you to help you avoid penalties, make the correct deductions, and minimize your tax burden. Contact a San Jose tax attorney today at 408-866-1810.


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