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Taxes and the Sharing Economy

Share and share alike, but watch out for the taxes!

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Fiducial Manassas

November 19, 2018 | 7 min read

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If you use one of the many online platforms available to rent a spare bedroom, provide car rides, or to connect and provide a number of other goods or services, you’re involved in what is popularly called the sharing economy. Being a part of this sharing economy may affect the way you fill and prepare your taxes or do your accounting work.

An emerging area of activity in the past few years, the sharing economy has changed how people commute, travel, rent vacation accommodations, and perform many other activities. Also referred to as the on-demand, gig, or access economy, the sharing economy allows individuals and groups to utilize technological advancements to arrange transactions to generate revenue from assets they possess – (such as cars and homes) – or services they provide – (such as household chores or technology services). Although this is a developing area of the economy, there are tax implications for the individuals and companies that provide these services.

This means if you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part-time business and even if you are paid in cash (tips are taxable). On the other hand, depending upon the circumstances, some or all of your business expenses may be deductible, subject to the normal tax limitations and rules. Individuals participating in the sharing economy should understand the potential tax issues affecting them.

Your trusted Fiducial tax advisor in Manassas is standing by to help with tax preparation issues and questions related to this emerging area. Fiducial can help in establishing a recordkeeping system that will enable allow the proper reporting of income and rooting out all the deductions to which the activity is entitled so you pay as little tax as necessary.

Individuals involved in the sharing economy will need to at least consider making estimated tax payments to avoid potential underpayment penalties. Timely estimated payments of the amount of federal (and state) income tax requires an analysis of income earned during each quarter should be made and estimated payments made by April 15, June 15, September 15, and January 15. There are safe harbor methods that may be used to simplify the calculation of the amounts to be paid each quarter. As your go-to source for all things related to the finances of your small business, you can Ttalk to your trusted Fiducial tax advisor and develop a tax preparation strategy that works for you.

Those that are employed and are involved in the sharing economy part-time may be able to adjust their withholding to “cover” the amount that would otherwise be needed to ensure against an underpayment penalty due to the income earned from the sharing activity.

Gross income includes all income from whatever source unless it is specifically excluded from gross income by the Internal Revenue Code. Thus, those who are paid for their services with property or stock, or who exchange their services for the services of another must generally treat the value of the property or services received as income. Usually, you must treat the fair market value of the property as income in the year in which the property is received. The fair market value of property or services received in exchange for providing services must be determined according to an objective standard or measure. The fair market value is the price at which the property or services would change hands between a willing buyer and a willing seller.

Technological advancements have given new life to the ancient practice of bartering. There are web sites for trading books, clothing, general merchandise, many other types of goods, and various services. Also, there are internet companies that allow members trade homes, either for vacation or permanently. Although these sites may be “free” in terms of no money changing hands between the parties (with the exception of a fee paid to the internet facilitator), the transactions are generally taxable. Barter, i.e., the swapping of goods and/or services, is a taxable event. The fair market value of the goods and/or services traded or received is gross income to the individual who provides either the goods and/or services.

A growing part of the sharing economy (and the world in general) is virtual currency. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction. For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. Someone who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.

Another area of interest and concern was addressed by IRS this week:

Social Security Wage Cap and Benefit Amounts Increase for 2019

For 2019, the Social Security wage cap will be $132,900, and Social Security and Supplemental Security Income (SSI) benefits will increase by 2.8 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

a 6.2 percent Social Security tax, also known as old age, survivors and disability insurance (OASDI); and
a 1.45 percent Medicare tax, also known as hospital insurance (HI).
For self-employed workers, the self-employment tax is 15.3 percent, consisting of:

a 12.4 percent OASDI tax; and
a 2.9 percent HI tax.
OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2019, the wage base is $132,900. Thus, OASDI tax applies only to the taxpayer’s first $132,900 in wages or net earnings from self-employment. Taxpayers do not pay OASDI tax on earnings that exceed $132,900. There is no wage cap for HI tax.

Maximum Social Security Tax for 2019

For workers who earn $132,900 or more in 2019:

an employee will pay a total of $8,239.80 in Social Security tax ($132,900 × 6.2 percent);
the employer will pay the same amount; and
a self-employed worker will pay a total of $16,479.60 in Social Security tax ($132,900 × 12.4 percent).
Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent on wages and self-employment income that exceed:

$250,000 for married taxpayers who file a joint return;
$125,000 for married taxpayers who file separate returns; and
$200,000 for other taxpayers.
The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2019

A cost-of-living adjustment (COLA) will increase Social Security and SSI benefits for 2019 by 2.8 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

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