Airbnb has risen in popularity over the last several years for both travelers and individuals looking to make an extra income. With its ease of use and the potential to earn some serious extra moula, it’s no wonder. With that being said, there are a lot of tax ramifications many Airbnb hosts are unaware of, like estimated taxes. Here we will outline what estimated taxes are, who are affected by them, and provide some estimated tax planning tips that can help you prepare for them.
Do I Need to Pay Estimated Taxes?
You may be wondering who is required to pay estimated taxes. The rules regarding estimated taxes are pretty straight forward: If you are self employed, and make over $1,000 in income, then the IRS wants quarterly payments from you. Since an employer is not withholding tax from your paycheck, and the IRS still wants their portion, you are responsible to remit payment quarterly. Quarterly payments are due:
- 1st Quarter Jan. 1- Mar 31 Due April 15
- 2nd Quarter April 1- May 31 Due June 15
- 3rd Quarter June 1 – Aug. 31 Due Sept. 15
- 4th Quarter Sept. 1 – Dec. 31 Due Jan. 15
Airbnb hosts are considered, self employed and therefore could be responsible for remitting estimated taxes. This is especially true, if you are on the high end of things providing meals and other amenities to your guests. At this point, the IRS may look at your little enterprise more like a traditional bed and breakfast.
There is one exception. According to the 14 day rule, otherwise known as the “Masters exception” on account of its popularity during the annual Masters golf tournament in Georgia, if hosts rent out their property for less than 14 days a year, and utilize the property themselves for 14 days or more per year, the the income doesn’t have to be reported to the IRS. This includes whole house rentals as well as single room rentals. However, if you do not report the income, you cannot take the associated deductions.
In addition, you can avoid estimated tax payments if you are also a W-2 employee, meaning you have a job where you receive regular income. If this is the case, you can simply increase your withholding from your employer to avoid having to pay estimated taxes.
Tax Planning Tips For Airbnb Hosts
Estimated taxes do not have to be a surprise, or case expensive penalties. By employing estimated tax planning strategies, Airbnb hosts can prepare for estimated taxes and also get ahead of the game for tax season. Here are some aspects of estimated tax planning:
Calculate Estimated Taxes
Calculating the correct amount you owe for estimated taxes can be a challenging part of estimated tax planning. After all you don’t have a crystal ball to see future income, right? The easiest way to calculate the amount you owe is to base it off the amount you paid last year. This works even if this is your first year hosting. Simply take the amount you paid the prior year and divide by 4. This amount will be the amount you pay on your quarterly payments. If at any time during the year your income increases or decreases, this amount can be altered.
Self Employed Taxes
Self employed taxes are another part of estimated taxes. This portion will include your portion and the employer portion of SSN and medicare. The self employed tax rate is 15.3%.
Deductions are a taxpayer’s saving grace. They help lower AGI (adjusted gross income), which in turn lowers the tax liability. Deductions play an important part in estimated tax planning for Airbnb hosts. Knowing which deductions are applicable to your business is crucial. Some expenses that qualify deductible expenses include:
- Improvements and Repairs – You want to attract more guest right, so perhaps you spent money on improvements. The costs associated with making improvements like painting or making repairs including furniture are considered a qualifying deductible expense.
- Cleaning and Maintenance – This includes the cost of hiring a professional cleaning service or the cost of purchasing cleaning supplies yourself.
- Textiles – If you purchased new bedding and towels for your business, these costs can be deducted.
- Service Charges – The fee Airbnb imposes are fully deductible.
- Property Insurance, PMI, Mortgage Insurance – A portion of your property insurance, private mortgage insurance (PMI), and mortgage insurance can be deducted.
- Utilities – This include electricity, water, gas, cable, and Internet.
- Entertainment – If you provide a streaming service for your guests like Netflix or Hulu, these expenses can be deducted.
- Travel to Your Rental – Travel expenses to your rental for business purposes can be deducted.
Submit Tax Payer Info to Airbnb
Airbnb is required to report income to the IRS. Because of this, they are entitled to withhold money from your payouts, usually 24%-28%, which could be a lot more than you actually owe. If you provide the necessary information, they will not withhold anything from your payouts. This allows you more room to plan your estimated tax strategy, which could save you thousands in taxes. In addition, if you have more than 200 stays or more than 20K in income, Airbnb will send a 1099-k. It is very important to report this income accurately, as failure to do so could result in the unwanted attention of the IRS.
Keep Impeccable Records
Part of a good estimated tax strategy is keeping good records. It is important to keep detailed records of guests stays, as well as receipts for business expenses. This way if the IRS has any questions, you have all the information handy.
Set Up Tax Saving Account
Setting up a tax saving account is a good way to ensure that funds are readily available to make tax payments. You can set aside a certain percentage of each payout in a separate account for peace of mind.
One of the most important reasons for estimated tax planning is to avoid penalties. Avoid penalties by calculating the correct amount you owe, and by paying your estimated taxes on time.
Finding An Accountant & Tax Advisor For Your Airbnb Business
Working with a tax advisor who understands your business is the best way to protect yourself from overpaying, and prevent unnecessary and expensive penalties. Working with a professional can help you form a good estimated tax strategy that could save you a lot of money on taxes. In addition to saving money, a professional will also be knowledgeable about compliance issues. To learn more about estimated tax planning strategies, connect with us here.