Airbnb has proven to be an excellent way for many people to generate income. What is really great about Airbnb is it allows you more freedom and flexibility. You can rent out your property as much as you want to. This creates a substantial full time or part-time income for many taxpayers. When it comes to the income you generate from Airbnb, it is important to understand the tax ramifications of being your own boss. Here is a brief guide on Airbnb taxes.
Understanding Airbnb Taxes
Running an Airbnb is just running any other business, in that taxes are due on the income you generate. Typically since Airbnb requires active management, it is considered an active trade or business. This classification renders hosts as self-employed businesses.
As a self-employed individual you are responsible for reporting and remitting your taxes on your own, since an employer isn’t withholding for you. The one exception is the 14 day rule, which states that if you rent out your space less than 14 days per year, you do not need to report the income. This is also referred to as the Masters Rule, which stems from the Masters golf tournament in Augusta Georgia. Due to the volume of attendees, homeowners in Augusta rent out temporarily their properties in order to accomodate the amount of visitors attending the tournament. Since they are not in it for the long-haul, Congress exempts this kind of rental activity.
Estimated Taxes and Self-Employed Taxes
Since no tax is being withheld from your income, you may be required to pay estimated taxes, which are due on a quarterly basis. If you expect to owe more than $1,000 in taxes, you will need to pay estimated taxes.Since an employer isn’t withholding taxes from you, and the IRS doesn’t want to wait to collect, estimated tax payments are due. Estimated taxes are due on a quarterly basis. Due dates are: April 15th, June 15th, September 15th, and January 15th. The due date moves to the next business day if the 15th falls on a weekend or holiday. But wait, how do you pay taxes on income you haven’t earned yet? The easiest way to calculate estimated tax payments is to take the total amount you paid in taxes the previous year, and divide that number by 4. Check here for how to make estimated payments online.
In addition to estimated taxes, you will also need to pay self-employed taxes which include your portion and the employer portion of social security and medicare taxes in the amount of 15.3%. Fortunately you can claim half of your self-employed taxes as a deductible expense. Should you have a loss, you will be able to offset income from your other sources of income. This can be an effective tax strategy for reducing taxable income.
Taxes on Rental Income
Rental income is treated the same as regular income. You earned it, so it needs to be taxed accordingly. However, running a rental property, even if it is for short term rentals, will allow you to deduct certain expenses to offset your rental income. The keyword rental income and Airbnb taxes is profit. Your profit is the amount left over after you deduct your expenses. This amount gets added to any other income you may have. Your total income should be evaluated holistically to determine your tax bracket and your tax rate. For more information on tax rates, reference the latest tax brackets here.
Rental Property Tax Deductions
When it comes to Airbnb or VRBO taxes, deductions are your best friend. The more deductions you have, the less you will owe in taxes. Deductions work to lower your taxable income, which in turn lowers your tax bill. Some examples of tax deductions that are applicable to rental property and Airbnb’s include:
- Mortgage/Rent Payments
- Property Insurance
- Utilities – Cable, Electricity, Internet, Phone,
- Service Fees
- Subscription Costs – Netflix, Hulu
- Supplies – Toiletries, Linens, Food, Furniture
- Travel Expenses
Paying Taxes on Rental Income
Calculating the amount of Airbnb taxes you owe is only half the battle, the next part is to remit payment. Fortunately, this is the easy part. The IRS has made it incredibly easy to pay your taxes. You can pay your taxes online, over the phone, or by mail. The easiest way to pay your taxes is online. Simply create an account on the IRS website. From there you can pay income taxes, estimated taxes, self-employed taxes, and even set up installment agreements.
Another strategy you may want to consider if you also work full time, is to increase the withholdings on your paychecks. You can instruct your employer to withhold more money from your paychecks to cover the additional amount you would be required to pay in taxes from your rental business. You may want to discuss this strategy with your tax advisor to make sure the correct amount is being withheld.
More Help With Airbnb Taxes
Working with a tax advisor who understands the Sharing Economy, and more importantly, Airbnb taxes can make a huge difference when it comes time to prepare and file your taxes. By working with a professional, you gain access to a wealth of knowledge, including ways to save money on your taxes. Perhaps there are some deductions available to you that you weren’t aware, or even compliance issues that could end up costing you more. Accuracy and timeliness are two of the most important things when it comes to tax preparation. By outsourcing your taxes to a professional, you can rest assured that your taxes will be prepared correctly and filed on time.
In addition, it is never too early to start planning for your taxes. Tax planning should take place all year long and involves planning for deductions, timing purchases, timing income, tax savings, making estimated taxes, and retirement planning. Remember your tax advisor can be a lot more than just a tax preparer. Talk to one of the tax experts at Shared Economy today to learn more. For more Airbnb tax tips subscribe to our newsletter.