If you’ve considered starting a side hustle to earn some extra money, you’ve probably come across Airbnb and other home sharing apps. While home sharing can be a lucrative way to turn your extra space into cash, it’s important to understand that this income is still subject to taxation. Here’s everything you need to know about home sharing taxes and how to prepare for filing.
Preparing Your Home Sharing Taxes
If you’re subject to U.S. income tax, you’ll need to include the revenue from your home sharing business when you file your taxes. This will require you to count the rental payments you receive in your gross income, which can include everything from the cost of the stay itself to the goods or services you supply to your guests.
Here are five things to keep in mind throughout the year so you’re ready when it comes time to file:
1. Determine If You Have to Pay These Taxes in the First Place
Depending on how often you rent out your space, you may not have to pay taxes on your home sharing revenue. Under the “minimal rental use” clause, you don’t have to report your rental income if you rent out a portion of your residence for less than 15 days a year, according to the IRS. Just remember: That means you can’t write off any expenses related to your home sharing business, either.
2. Submit Form W-9
According to TurboTax, home sharing hosts should always submit a Form W-9. If you don’t, services like Airbnb must withhold 28 percent of your rental income. Why get stuck with a higher tax rate? When you do file your W-9, the home rental company can lower the percentage it withholds from your income.
3. Treat It Like a Business
If you’re renting out your space, accredited tax preparer Abby Eisenkraft says to treat it like a business. That means that you must take on the required accounting and financial work. “You should have a separate bank account into which you deposit your income and withdraw for expenses,” she says.
Set up a business checking account so that it’s easy to keep your personal and business finances separate. This is where you’ll deposit the income from your renters and withdraw money to pay for your business-related expenses. Then, you’ll need a business savings account to set aside money for your home sharing taxes.
“An important thing to note: Airbnb only sends you a 1099 if you’ve earned $20,000 and have had over 200 reservations during the year,” says financial coach Maggie Germano. However, you will still need to pay self-employment tax on this income so the IRS doesn’t come knocking.
4. Track Your Expenses
Like any business, there are some costs associated with home sharing. Sure, you’re receiving extra cash from your rental income, but you’ll also need to spend money if you want your side business to be a success. For example, you may need to invest in a housekeeper after each rental term, or purchase more amenities for the space as they deplete. That means you’ll have to keep receipts for absolutely everything you purchase for your rental space.
“I would advise that you keep track of any and all spending associated with your Airbnb space. Even the little things, like towels and toiletries, can add up and help when it comes to taxes,” says Germano.
If you made a purchase to support your rental business, it’s most likely tax deductible. And if you rented your space for more than 14 days, you can also deduct any fees related to hosting, like Airbnb’s 3 percent host service fee.
5. Understand Occupancy Taxes
Last but not least, you may need to collect occupancy taxes for your rental space, so don’t forget to check your local ordinances to determine if these taxes apply to your area. Luckily, if you’re renting through a home sharing company, it may collect and submit occupancy taxes on your behalf.
Know the Rules Before You Start
In the sharing economy, it’s easy to turn your extra space into extra cash. But it’s also important to stay on top of your tax situation and know the local laws and regulations.
“Many people are surprised about the taxation with Airbnb. I have clients who think they can write off their entire rent — which is not even close. There’s a great deal of required record keeping,” says Eisenkraft.
Play it safe: Know what you can and can’t write off, and understand the 14-day rule. When you set aside enough for taxes, you’ll be able to enjoy your side hustle without all the hassle.