Early last year, a New York-based freelancer—let’s call him Henry—had to travel for a project. The job required him to be gone for a few months, so, in order to offset the cost of his room in the East Village, Henry fired up Airbnb, snapped a few pictures, wrote a short description, and listed his space for rent.
Things went well enough. Apparently, there were enough takers to cover the cost of rent and utilities for the time he would be away; he even ended up making a modest profit. Then, a couple of months later in January, he got hit with something in the mailbox that he wasn’t expecting: A 1099-K tax form.
“Airbnb reported the money I made off the site, and I got a tax bill for the full amount,” Henry, who asked that his identity remain hidden because he didn’t want to be associated with Airbnb, explained in an email. “I didn’t really turn a profit from my Airbnb-ing so it wasn’t a problem for me, but I know that it could become a very big problem for people that rely on the site as a source of supplemental income.” Henry assumed that income taxes were taken out automatically whenever Airbnb paid him, which wasn’t the case. That it leaves for you to handle.
It was an honest oversight on Henry’s part, sure. But his confusion speaks to one of the little understood realities that come with the quote-unquote “sharing economy,” or when ordinary people offer up space in their cars, their bicycles, and in Airbnb’s case, the place where they sleep (or perhaps don’t), for additional income.
“People get woken up because they get sent a 1099-K, which is just this amorphous form at this point,” says Russell Garofalo, founder of Brass Taxes in Brooklyn, which specializes in doing taxes for freelancers, artists, and other creative types. “It’s indicated that the IRS knows about this money, but you don’t know what to do about it. And you’re like, ‘What the fuck is this?’”
Garofalo says he isn’t fond of the term the “sharing economy” because it leaves you with “a bunch of contractors with no rights” and “no price protections or benefits.” Yet he says he has observed a sharp uptick in clients leveraging their rooms for additional cash since Airbnb debuted five years ago. And many of his customers are unsure of how they are being taxed.
Wait, What’s A 1099?
As nice as it would be to keep what you earned from Uncle Sam, not reporting your income when tax season rolls around is both against the law, and easily traceable. At face value, 1099 self-employment forms aren’t very complicated: All they contain are your name, your address, your Social Security number, and the amount of money that the company reported to the IRS. Receiving one essentially means no taxes were taken out whenever you were cut a check. You’re basically an entrepreneur. Congrats!
Furthermore, everyone from Amazon to Airbnb uses them, leaving it up to you to report your income. And if you weren’t saving funds as you went along, for example, the taxes you incur can be hefty. Chris Schultz, the CEO of Kung Fu, an upstart information broker designed to help independent contractors and companies understands worker’s rights, tells me that, assuming a 25% tax bracket and 15.3% self employment insurance, some people will be owing upwards of 40% of what they earned in Federal taxes. Which, yikes.
And if your freelance employer hasn’t told you how your 1099 taxes work, that’s not a bug—it’s a feature.
These companies lean on independent contractors for all sorts of reasons that, depending on your vantage point, can range from nefarious to, well, a smart way to run a business. One of the reasons startups are hesitant to walk its contractors gently through the tax process is to distinguish themselves from a full-time employer. Huge penalties can be incurred if the distinction between a W2 employee and a 1099 worker isn’t clear. (It’s a lesson that on-demand house-cleaning service Handy is learning the hard way, when two contractors filed a lawsuit in California last November for allegedly misclassifying employees as independent contractors.)
“To maintain their workforce classification as independent contractors, [companies] need to be cautious about the training they provide to stay in compliance with the 20 point checklist the IRS guidelines provide,” Schultz explains. “Not to mention, their lawyers and CPA’s probably advise against it.”
Adding to the confusion is the fact that different companies dipping into the sharing-economy cookie jar can take radically different approaches. Lyft, for example, goes out of its way to make it abundantly clear from the outset that taxes are not withheld when drivers are paid. “Lyft provides a lot of basic guidance on their driver portal,” says Ayanna Mack, a Lyft driver who recently started in Washington, D.C., “but they encourage drivers to be aware of their local tax requirements and unique factors that impact their individual reporting situations.”
“As a driver I feel like they were very clear [about how you are taxed],” she adds.
While several of the Airbnb renters I talked to understood that their income was not being taxed at the outset, and were thus prepared for tax season, they felt they were in the minority. “I think I’m one of the only people I knew who expected that,” says Zachary Mack, a New York-based writer and bar owner. “I had friends email me in a panic asking if the same thing had happened to me because they owed a lot of money in some cases.” Mack says that Airbnb did not try to bury the fact that you are being taxed when you list your space for rental, while others said the company could be more thorough: Airbnb’s walkthrough on what’s income deductible (and what isn’t) is, shall we say, not very thorough at about a paragraph long. Here’s what Airbnb recommends:
“We encourage you to consult a tax advisor for more details as there are many special rules in this area and we aren’t able to provide tax advice.”
Slapping a pink mustache on your Prius grill and chaperoning strangers to where they need to be is easy enough. It’s a relatively simple transaction, from Point A to Point B, financially speaking. Part of what makes Airbnb so confusing for some people, though, is that the rulebook for rentals is this big, opaque, multi-pronged mess that can change on a whim based on a number of factors: Whether you’re renting the whole apartment or just your room, how many times you do it in a year, what you can and can’t write-off. It’s sort of like a Choose Your Own Adventure, only the wrong decision might mean deducting a couple hundred extra dollars from your saving account.
“When it comes to your own house, the rules are just different,” says Dan Hobbs, a former Goldman Sachs analyst who currently specializes as a tax advisor for the sharing economy, having authored a mouthful of an e-book called 2014 Income Tax Guide for Airbnb Hosts: Hosting Less than 15 Days a Year. (Phew!) “The real consequence is knowing what you can and can’t deduct.”
Nicer furniture, for example, isn’t deductible, which is something to think about before your splurge for a Tumblr-ready Eames chair in the lounge. But say you sign up for a concierge service like Huit.ly. You can leave a copy of your keys with Huit.ly, go on vacation, let them know when an Airbnb renter is going to swing by, Huit.ly gives them the key, and voila!—you incur a $50 fee. That’s tax deductible.
Confusing? You bet. So I asked Hobbs: What are some things an Airbnb renters should know?
“I’d say two things,” he says. “One in general, if you rent your apartment for less than 15 days a year, it’s not taxable income. You don’t pay any taxes on a federal level. And if you do over that, it gets really complicated, because it’s treated as income.”
And two? “If you live in a studio apartment or an entire apartment, that whole day’s apartment is tax deductible. If you only rent out the bedroom, only the size of the bedroom is going to be tax deductible. It doesn’t matter if you share a common area or anything else. That percentage of that days rent is going to be taxed.”
Perhaps the wisest (and dare we say, most obvious?) thing anyone partaking in the pocket-padding graces of the sharing economy can do is familiarize themselves with how and when their services are being taxed from the outset. It’s not free money. That way, when a 1099-K magically floats its way into your mailbox, you’ll be prepared instead of surprised. And broke, probably.